THERE  can  be  no 
Kope  of  progress  or 
freedom  for  the 
people  without  the  un- 
restricted and  complete 
enjoyment  of  the  right 
of  free  speech,  free  press 
and  peaceful  assembly. 

Gift  of 

IRA  B.  CROSS 


GIFT  OF 
IrcL  ^.    Cross 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/abcsofbusinessOOmckerich 


The  A  B  C's  of  Business 


^J^g^ 


THE    MACMILLAN   COMPANY 

HBW  YORK   •    BOSTON   •   CHICAGO   •    DALLAS 
ATLANTA   •   SAN  FRANCISCO 

MACMILLAN  &  CO..  Limited 

LONDON   •    BOMBAY    •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OP  CANADA,  Lm. 

TOEONTO 


The  A  B  C's  of  Business 


•       >     • 


*  •.  «     « 


BY 

HENRY  S.  McKEE 


iReto  gorii 

THE  MACMILLAN  COMPANY 

1922 

All  rights  reserved 


PBINTED  IN  THE  UNITED  STATES  OF  AMEfiICA 

'2> 


y^  ^ 


OOPTMQHT,    1922, 

Bt  the  macmillan  company. 


Set  up  and  electrotyped.     Published  September,  1928. 

^'1''     Oi:     lira    fe.Cros^ 


Press  of 

J.  J.  Little  &  Ives  Company 

New  York,  U.  S.  A. 


INTRODUCTION 

Probably  the  greatest  resource  of  any  country 
is  the  cultivated  intelligence  of  its  people. 

Inasmuch  as  American  industry  has  for  its  ob- 
ject the  fullest  possible  development  and  use  of 
our  country's  resources,  then  this  particular  re- 
source, being  the  most  valuable,  should  receive  the 
most  industrious  cultivation. 

But  instead  of  this,  our  situation  is  quite  the 
reverse.  In  fact,  our  imperfect  understanding  of 
the  governing  principles  of  business,  of  how  we 
live  and  are  industrially  organized,  was  one  of  the 
most  amazing  of  the  many  discoveries  about  our- 
selves for  which  we  are  indebted  to  the  World 
War.  Our  war  task  was  rendered  gravely  difficult 
by  Democracy's  greatest  menace — well-meaning 
ignorance.  At  every  step  of  our  national  life  we 
have  been  hampered  and  often  seriously  injured 
by  the  wide  prevalence  of  unsound  economic  and 
financial  doctrines,  urged  upon  us  with  all  the  sin- 
cere zeal  of  half -knowledge. 

As  a  nation  we  are  ingenious,  courageous,  origi- 
nal and  inventive,  industrious,  and  various  other 


519861 


VI  INTEODUOTION 

things  greatly  to  be  admired,  but  as  to  any  wide- 
spread knowledge  of  how  we  are  industrially  or- 
ganized for  our  national  tasks,  or  as  to  any  under- 
standing of  the  economic  principles  that  must  gov- 
ern our  conduct  and  determine  our  success  or  fail- 
ure, we  have  been  aptly  described  upon  high 
authority  as  a  nation  of  economic  illiterates. 

It  thus  appears  that  there  is  a  vast  field  of  un- 
developed national  wealth,  awaiting  only  the  ser- 
vice of  a  higher  popular  intelligence  and  a  greater 
intensity  of  interest  in  business,  economic,  and 
financial  subjects.  In  what  follows  there  is  little 
pretense  to  any  scientifically  instructive  contri- 
bution toward  such  education,  but  merely  sug- 
gestive reference  to  and  comment  upon  matters 
deeply  affecting  the  daily  life  and  work  and  wel- 
fare of  all  of  us,  upon  which  complete  and  popular 
enlightenment  would  do  more  to  enrich  us  than 
any  other  of  our  vast  sources  of  future  wealth  and 
national  contentment. 

Acknowledgment  is  made  to  Stewart  McKee, 
who  contributed  the  chapter  on  Internationalism 
and  supplied  helpful  criticism  and  suggestion 
upon  the  remainder. 

Los  Angeles 
October,  1921 


CONTENTS 

Introduction y 

CHIPTBR 

I.     The  Complex  Character  of  Our  Business 

Organization 9 

II.    The  Misunderstanding  of  Money  ...  25 

III.  Wages  and  Wealth 34 

IV.  The  Elements  of  Banking 54 

V.    Business  Consequences  of  the  War       .      .  68 

VI.    The  Abuse  of  Our  Railways 85 

VII.    Speculators  and  Markets     .....  91 

VIII.    Good  and  Bad  Times 103 

IX.    Internationalism Ill 

X.    Education    ....««!»•••  126 


THE  A  B  C'S  OF  BUSINESS 

CHAPTER  I 

THE  COMPLEX   CHARACTEB  OF  OUB  BUSINESS 
ORGANIZATION 

If  American  business  is  to  be  understood  at  all, 
it  must  be  viewed  as  a  whole.  And  yet  few  of  us 
ever  see  or  come  into  contact  with  more  than  a 
part  of  it,  so  small  as  to  be  almost  microscopic 
in  relative  importance. 

It  is  transacted  over  an  area  three  thousand 
by  two  thousand  miles  in  extent,  while  each  one 
of  us  goes  seldom  outside  an  area  of  a  few  city 
blocks.  It  is  conducted  by  a  population  of  one 
hundred  and  ten  million  people,  whereas  each  of 
us  knows  hardly  more  than  a  few  dozen.  One 
man,  working  yesterday  in  his  office  or  farm  or 
factory,  knows  what  he  did  (and  may  or  may  not 
understand  the  true  significance  of  it).  He  per- 
haps knows  a  little  something  of  what  was  done 
by  a  few  who  stood  in  immediate  contact  with 
him.  But  throughout  the  nation  perhaps  forty 
million  people  worked  that  day.     When  night 


10  THE  A  B  O'S   OF  BUSINESS 

came  they  had  accomplished  a  great  total  of 
mainly  creative  work.  He  knows  nothing  of  what 
any  of  them  did.  And  yet  they  were  all  working 
for  one  another.  Each  one  was  producing  some- 
thing for  the  use  and  benefit  of  the  others.  More- 
over, they  were  all  doing  this  in  obedience  to 
(or  more  likely  in  violation  of)  certain  economic 
laws  which  were  enacted  by  no  legislature ;  which 
cannot  be  repealed ;  which  are  self -enforcing  laws 
with  severe  punishments  for  disobedience.  These 
punishments  take  such  forms  as  the  panic,  the 
period  of  disaster  and  business  depression,  un- 
employment and  the  bread  line.  Being,  as  we 
have  been  called,  a  nation  of  economic  illiterates, 
we  do  not  understand  that  we  brought  these  visi- 
tations upon  ourselves,  nor  how  we  did  it. 

In  our  social  and  political  life,  governed  by 
legislatures  and  the  police,  it  is  an  axiom  that 
ignorance  of  the  law  excuses  no  man.  But  in  our 
industrial  life,  which  is  governed  by  far  higher, 
simpler  economic  laws  of  world-wide  application, 
we  do  not  even  ask  what  the  law  is.  Most  of  us 
think  that  there  are  no  such  laws  and  so  are 
unaware  of  having  violated  them,  just  because  we 
do  not  see  the  policeman  and  are  not  formally 
accused  by  the  district  attorney. 

We  know  that  as  a  people  we  are  periodically 


CHARACTEB  OF   OUB  BUSINESS   ORGANIZATIOIT         11 

punished  in  the  form  of  hard  times  or  lost  jobs  or 
higher  prices  or  tight  money,  but  we  do  not  know 
what  we  did  to  deserve  it.  In  this  case,  too,  igno- 
rance of  the  law  excuses  no  man.  The  reason  we 
do  not  know  what  we  did  is  that  as  a  people  we 
never  read  the  law.  We  do  not  know  we  have  been 
violating  one.  We  do  not  even  know  there  is  an 
economic  law.  We  see  no  attorneys  about  who 
expound  and  practice  it,  and  give  us  warning. 
There  are  some,  but  we  do  not  recognize  them  as 
being  such;  for  they  are  in  contempt  with  most 
of  us  as  being  merely  impractical  theorists,  who 
lecture  at  universities  or  write  supposedly  learned 
but  very  obscure  books  of  little  practical  value. 
In  addition  to  these,  there  is  now  and  then  the 
occasional  studious  business  man  or  banker,  but 
even  he  is  apt  to  be  regarded  by  the  more  hard- 
headed,  who  rely  upon  experience,  or  by  the 
leaders  of  organized  labor  who  seem  to  get  their 
wisdom  by  inspiration,  as  being  over-educated 
and  a  theorist.  The  charge  that  is  made  against 
these  men,  the  economist  and  student,  is  that  they 
have  what  is  rather  scornfully  called  book  knowl- 
edge. Just  what  kind  of  knowledge  this  was  be- 
fore someone  put  it  in  a  book  has  never  been  quite 
fuUy  explained,  nor  how  putting  it  in  a  book  sub- 
tracted anything  from  its  value. 


12  THE  A  B  O'S  OF  BUSINESS 

If  one  could  rise  to  an  altitude  high  enough 
above  the  United  States  to  bring  it  aU  within  his 
range  of  vision  and  then  view  it  through  a  glass 
sufficiently  powerful  to  show  the  detail,  he  could 
view  this  country  as  one  great  industrial  estab- 
lishment employing  one  hundred  million  people. 
The  thing  he  would  see  might  be  called  the  plant. 
It  has  an  investment  value  of  perhaps  three  hun- 
dred billion  dollars.  This  plant,  or  fixed  invest- 
ment, consists  mainly  of  farms,  mines,  factories, 
railways,  ships,  docks,  warehouses,  office  buildings, 
banks,  wholesale  stores  and  retail  shops,  schools, 
dwellings,  wires,  pipes,  and  machinery.  About 
the  proper  amount  of  each  one  of  those  things  has 
been  provided,  through  the  free  operation  of  the 
competitive  principle  and  the  right  of  every  man 
to  select  his  own  occupation. 

This  plant,  has  been  built  and  is  being  operated 
for  no  other  purpose  than  to  provide  the  American 
people  with  the  things  they  want.  It  was  built 
and  is  operated  under  the  government  of  economic 
law.  It  is  the  best  plant  in  existence,  with  room 
for  immense  further  development.  It  contains 
the  greatest  known  stores  of  raw  material 
waiting  to  be  worked  up.  Its  hundred  mil- 
lion workers  are  probably  not  equaled  in 
skill   by    any    other    body    of    workers    of    the 


OHAEACTEB  OF   OUB  BUSINESS   OEGAISXZATION         1^ 

same  size  in  existence.  These  workers  pro- 
duce for  themselves  and  enjoy  more  of  the  neces- 
saries, comforts,  and  luxuries  than  any  other  peo- 
ple. It  is  said  that  the  annual  output  of  the  plant 
in  goods  would  be  valued  at  perhaps  forty  or  fifty 
billion  dollars.  The  American  people  usually  con- 
sume all  these  goods  which  they  produce  in  this 
way  during  the  year,  except  perhaps  five  billion 
dollars'  worth  which,  in  one  form  or  another,  re- 
mains in  existence  as  new  wealth.  Probably  this 
new  wealth  finally  takes  the  form  of  additions  to 
the  plant,  new  construction,  or  perhaps  partly  the 
form  of  debts  due  us  from  foreign  countries  to 
which  we  send  some  of  the  goods.  The  distribu- 
tion of  the  goods  that  are  produced  is  not  always 
just  and  equitable,  but  in  the  main  it  seems  to  be 
true  that  this  plant,  like  most  private  concerns, 
really  seems  to  pay  its  workers  about  in  propor- 
tion to  the  value  of  the  services  they  render.  The 
average  American  seems  generally  to  get  out  of 
life  just  about  what  he  puts  into  it.  The  world 
has  a  way  of  paying  him  about  what  his  services 
are  really  worth. 

Naturally,  an  organization  so  highly  compli- 
cated as  this  is  easily  thrown  out  of  adjustment. 
A  state  of  prosperity  may  be  said  to  exist  when 
each  branch  of  industry,  working  to  full  capacity, 


14  THE  A  B   C'S   OF  BUSINESS 

is  turning  out  just  the  right  amount  of  product 
to  serve  fully  the  needs  of  other  industries  that 
are  related  to  and  dependent  upon  it;  so  that 
every  plant  and  every  man  is  fully  employed  and 
not  delayed  or  hindered  by  troubles  in  some 
other  essential  part  of  the  plant. 

A  prosperous  year  is  one  in  which,  with  abun- 
dant crops  from  the  farms,  there  was  also  mined 
the  proper  amount  of  coal  to  keep  the  boilers  go- 
ing in  the  factories,  locomotives,  ships,  power 
plants,  and  houses ;  in  which  the  wool  and  cotton 
growers  furnished  the  textile  mills  with  a  full 
supply  of  raw  materials  for  cloth;  in  which  the 
makers  of  dye  stuffs  produced  the  correct  quan- 
tity of  dyes ;  in  which  there  was  delivered  to  the 
steel  industry  an  unbroken  supply  of  ore  and 
coal,  to  enable  it  to  build  for  the  farms  the  right 
amount  of  harvesting  machinery  and  for  the  cities 
the  right  amount  of  structural  steel  and  indus- 
trial tools ;  in  which  all  these  things  were  done  at 
exactly  the  right  time ;  and  perhaps,  in  all  things 
except  crops,  a  prosperous  year  is  one  in  which 
our  railway  system  finds  itself  adequately 
equipped  and  in  sound  physical  condition  to  move 
promptly  perhaps  fifty  billion  dollars'  worth  of 
things  from  place  to  place,  to  pick  up  each  thing 
where  it  is  and  move  it  quickly  to  the  place  where 


CHARACTEB  OP   OUB  BUSINESS   OBGANIZATION         15 

it  is  going  to  be  needed  next,  without  keeping  any- 
body waiting  in  unproductive  idleness.  A  pros- 
perous year  would  be  one  in  which  one  hundred 
million  people  each  did  a  full  day's  work  on  every 
working  day,  finding  it  each  day  possible  to  do 
so  because  of  an  abundance  of  tools  and  materials 
promptly  supphed  to  each  one  by  virtue  of  the 
fact  that  every  other  man,  on  whom  he  depends, 
was  doing  his  full  part. 

In  such  a  year  as  this  the  American  plant  might 
turn  out  twice  its  normal  output  of  the  neces- 
saries, conveniences,  and  luxuries  of  life.  Every- 
thing would  be  abundant  and  prices  consequently 
lower.  Everyone  would  be  employed  and  conse- 
quently able  to  buy  his  fair  proportion  of  what  the 
plant  produced.  America  would  be  called  rich 
and  prosperous.  It  is  a  state  of  affairs  that  is 
gradually  approached  as  we  bring  the  various 
parts  of  our  plant  into  nicer  adjustment  to  one 
another  in  obedience  to  economic  law. 

It  is  said  that  in  this  American  plant  a  varia- 
tion of  some  ten  per  cent  in  the  total  quantity  of 
goods  produced  marks  about  the  difference  be- 
tween a  boom  and  a  business  depression.  This 
variation  may  be  quite  easily  brought  about,  as 
we  have  gone  so  very  far  in  applying  the  prin- 
ciple of  the  division  of  labor  that  disturbances 


16  THE   A  B   O'S  OP  BUSINESS 

may  proceed  from  very  remote  causes.  The  sup- 
ply of  paper  pulp  from  distant  forests  has  been 
known  to  fall  so  low  as  to  threaten  to  suspend  the 
publication  of  newspapers.  Little  general  anxiety 
was  felt.  Perhaps  there  was  occasion  for  none, 
but  the  danger  called  attention  to  our  unconscious 
complete  dependence  upon  the  press  for  many 
things,  among  them  daily  market  reports,  with- 
out which  all  commerce  would  fall  into  confusion, 
as  few  would  know  the  value  of  anything.  It 
semns  probable  that  the  publishing  and  book-sell- 
ing businesses  must  have  sustained  considerable 
injury  by  the  invention  of  so  remote  a  thing  as  the 
gasoline  motor  or  the  motion  picture  camera,  as 
these  new  recreations  drew  readers  from  the  li- 
brary to  the  highway  or  the  theater. 

Some  of  us,  whose  preference  is  for  general 
business,  employ  our  entire  capital  in  that  and  so 
prefer  to  pay  rent  for  the  use  of  the  premises,  in- 
stead of  investing  capital  in  land  and  buildings. 
Others  know  nothing  of  business,  so  do  their  part 
by  erecting  buildings  and  providing  housing  for 
business  and  residence.  If  there  is  a  scarcity  of 
housing,  tenants  compete  for  its  use  by  offering 
higher  rents.  These  high  rents  attract  more  capi- 
tal into  building  and  thus  we  are  soon  provided 
with  an  adequate  supply  of  housing.    As  we  get 


CHAEACTBE  OF   OUB  BUSINESS   OEQANTZATION         17 

enough,  or  too  much,  rents  come  down  again.  This 
is  the  operation  of  economic  law.  It  brings  things 
into  proper  adjustment  if  let  alone.  The  only 
way  to  get  housing  at  a  proper  and  fair  rental  is 
to  pay  high  rent  until  someone  provides  more 
housing.  If  they  provide  too  much,  they  will  be 
punished  for  a  while  by  too  low  a  rent. 

Simple  as  all  this  is,  we  do  not  seem  to  under- 
stand it.  When  more  housing  is  needed  and  the 
natural  remedy  is  being  applied  in  the  form  of 
high  rents,  we  are  very  likely  to  call  the  legisla- 
ture together  and  pass  a  law  forbidding  high 
rents,  or  apply  some  other  quack  remedy  that  pro- 
duces just  the  opposite  effect  of  the  one  desired, 
so  great  is  our  national  ignorance  about  the  intri- 
cate organization  of  our  industrial  plant  and  the 
laws  which  govern  it.  If  a  referendum  election 
were  held  (in  any  American  city  afflicted  with 
that  system  of  government),  to  determine  by  pop- 
ular vote  whether  telephone  rates  should  be  re- 
duced from,  say  ten  dollars  per  month  to  one 
dollar,  there  is  no  serious  doubt  that  it  would 
carry  by  a  great  majority.  The  consequences  that 
would  follow  and  the  lesson  learned  thereby  fairly 
illustrate  the  American  method  of  taking  a  course 
of  study  in  economics  and  industrial  organiza- 
tion.   And  it  is  not  confined  to  the  average  voter. 


18  THE  A  B  C'S   OP  BUSINESS 

A  Boston  banker  who,  every  year,  loans  money 
upon  the  security  of  wool  lying  in  Boston  ware- 
houses was  recently  attracted  by  the  higher  in- 
terest rate  obtained  by  a  banker  friend  in  Flag- 
staff, Arizona,  but  upon  learning  that  the  Ari- 
zona bank's  security  consisted  of  sheep  walking 
about  for  months  through  a  vast  range  of  moun- 
tains, he  viewed  the  loans  as  simple  western  in- 
sanity. What  he  said  was  that  back  in  Boston 
they  would  **just  as  soon  loan  money  on  a  shoal 
of  shad  out  in  the  bay/'  And  yet  he  is  in  gen- 
eral a  very  intelligent  man.  He  simply  did  not 
realize  that  he  and  the  Arizona  banker  were  both 
really  in  the  business  of  producing  wool  clothing. 
They  are  both  a  part  of  that  industry.  Each 
knows  only  his  trifling  part  of  the  industry,  which 
is  to  extend  credit  against  wool  at  a  particular 
stage  of  its  progress  from  the  sheep  range  to  the 
retail  clothing  store. 

During  the  war  there  was  great  uneasiness  in 
California  because  the  people  of  that  state  were 
continuously  paying  the  Government  vast  sums  of 
money  for  bonds  and  taxes,  and  the  Government 
was  spending  it  all  in  the  Eastern  munition  cen- 
ters. California  was  expecting  to  be  thus  com- 
pletely drained  of  money,  and  yet  the  opposite 
happened.    The  process  afforded  a  perfect  oppor- 


CHABACTEB  OF   OUB  BUSINESS   OBGANIZATION         19 

tunity  to  observe  the  workings  of  the  American 
industrial  plant,  regarded  as  a  whole,  working 
under  that  fundamental  principle  of  modern  in- 
dustry known  as  the  division  of  labor. 

It  is  true,  of  course,  that  the  completed  guns 
were  delivered  to  the  Government  and  paid  for 
at,  perhaps,  Bethlehem,  Pennsylvania,  and  a  man- 
ufacturer there  received  the  final  purchase  price 
in  money,  but  before  receiving  it  he  had  already 
paid  out  nearly  all  of  it  for  labor  and  material. 
The  money  he  had  spent  for  material  and  the 
money  his  workmen  had  spent  for  things  to  wear 
and  eat  had  already  reached  nearly  every  state 
in  the  Union.  Even  what  remained  to  the  manu- 
facturer probably  went  to  the  holders  of  his  bonds 
and  stocks,  and  these  might  reside  anywhere. 
Most  of  what  he  received  was  paid  to  workmen 
and  they  spent  most  of  it  within  the  same  week  for 
things  produced  in  distant  places.  The  thing  is 
so  complicated  the  human  imagination  can  hardly 
follow  it.  When  an  employee  of  the  Bethlehem 
Steel  Company  does  so  simple  a  thing  as  use  a 
match  to  light  his  pipe,  he  has  spent  money  in 
numerous  localities.  He  has  paid  some  Northern 
state  for  the  wood  in  the  match,  a  Southern  state 
for  the  chemicals  in  the  match  head.  His  cloth- 
ing came  from  Southern  cotton  or  Idaho  wool; 


20  THE  A  B  C'S  OF  BUSINESS 

his  food  perhaps  from  the  Pacific  Coast.  Every 
state  in  the  Union  takes  part  in  the  manufacture 
of  virtually  everything  that  is  produced  by  in- 
dustry. It,  therefore,  turned  out  (though  it  is 
but  little  understood)  that  California  got  part  of 
its  bond  and  tax  money  back  again  by  selling 
beans  to  a  miner  in  Arizona,  who  produced  cop- 
per that  was  finally  turned  into  a  shell  casing  at 
Bridgeport.  The  important  fact  is  that,  under 
the  principle  of  the  division  of  labor,  we  profit 
most  by  producing  those  things  we  can  produce 
with  the  greatest  economy  and  abundance. 

The  simple  fact  is  that  American  business  is 
nothing  but  the  work  all  of  us  are  performing 
every  day,  each  according  to  his  choice.  In  do- 
ing this  work  we  have  only  one  purpose :  namely, 
to  produce  food,  clothing,  shelter,  and  some  addi- 
tional conveniences,  decencies,  and  luxuries,  and 
to  divide  and  distribute  these  among  ourselves  and 
live  upon  them  while  producing  more.  Naturally 
there  is  nothing  to  divide  and  live  upon  except 
what  we  currently  produce;  unless  we  choose  to 
divide  and  consume  the  plant  itself  and  thus  re- 
store America  to  the  condition  in  which  Columbus 
discovered  it  when  inhabited  by  Indians.  The 
natural  resources  of  America  were  as  great  then 
as  they  are  now.    We  live  better  than  the  Indians 


CHABACTEB   OP   OUR  BUSHfTESS   OBGANIZATION         21 

only  because  we  produce  more.  We  produce  it 
from  the  very  same  sources,  but  we  have  increased 
the  output  partly  by  building  up  a  great  mechani- 
cal plant  (the  investment  of  capital)  to  do  most 
of  the  work,  instead  of  merely  usiug  our  naked 
hands,  and  partly  by  training  each  man  to  pro- 
duce one  thing  only,  in  great  quantity;  relying 
upon  others  to  supply  him  with  everything  he 
needs  in  exchange  for  his  own  output. 

In  its  simplest  terms  we  might  imagine  a  great 
national  market  place,  to  which  each  man  goes  and 
deposits  there  the  thing  he  has  produced  in  great 
quantity,  satisfying  his  own  needs  by  carrying 
away  a  small  quantity  of  each  of  the  innumerable 
things  that  others  have  brought.  Most  of  the 
confusion  of  thought  about  business  seems  to 
have  begun  when  we  gave  up  the  simple  practice 
of  barter  at  the  market  place  and  passed  into 
the  more  modem  and  complex  usages  of  com- 
merce. At  that  time  we  invented  a  new  standard- 
ized tool  known  by  the  name  of  money,  and  its 
purpose  was  to  facilitate  our  exchanges.  We 
stopped  trading  things  for  other  things  and  began 
trading  things  for  money  and  the  money  for  the 
other  things.  We  thus  got  to  thinking  and  talk- 
ing of  everything  in  terms  of  money.  We  are  still 
bartering  things  for  things  just  as  essentially  as 


22  THE   A  B   C'S  OF  BUSINESS 

we  always  did,  but  because  we  never  see  but  half 
of  the  complete  operation — money  standing  al- 
ways in  between — ^we  have  lost  all  realization  of 
the  simple  truth  that  we  are  still  trading  things 
for  things  and  that  money  is  a  mere  tool,  and  we 
have  come  to  regard  it  as  an  end  in  itself.  And, 
to  make  matters  worse,  money,  like  most  other  in- 
ventions, has  had  improvements  made  upon  it  in 
the  form  of  paper  tokens,  credit  instruments,  and 
bookkeeping  entries  which  are  used  in  place  of 
it,  and  these  have  still  further  disguised  the  real 
nature  of  money  and  obscured  the  truth  about  our 
real  transactions.  The  essential  and  important 
thing  about  it  all  is  that  we  simply  produce  goods 
and  services  and  trade  them  for  other  goods  and 
services,  and  we  can  only  divide  among  ourselves 
in  this  way  what  our  united  efforts  have  produced. 
We  have  national  prosperity  or  poverty  as  we 
produce  much  or  little. 

The  thing  that  has  distinguished  America  as  an 
industrial  country  is  the  great  abundance  of  its 
production  of  wealth  in  proportion  to  its  popula- 
tion. Aside  from  certain  personal  qualities,  such 
as  inventiveness,  resourcefulness,  and  adaptabil- 
ity, inherited  from  Americans  who,  for  several 
generations,  developed  those  qualities  by  pioneer- 
ing the  wilderness  that  lay  west  of  them,  this 


CHARACTER   OF   OUR   BUSINESS    ORGAITIZATION         23 

great  productive  power  per  inhabitant  is  due  to 
the  unequaled  extent  to  which  we  employ  tools, 
machinery,  and  equipment.  No  other  nation  util- 
izes so  many  mechanical  horse  power  per  man. 

Billions  of  tons  of  freight  and  endless  passen- 
gers require  to  be  moved  from  place  to  place,  and 
the  performance  of  this  task,  of  indescribable 
magnitude,  by  the  two  million  men  who  are  em- 
ployed in  the  railway  service,  has  been  made  pos- 
sible only  because  for  each  man  so  employed  we 
have  invested  ten  thousand  dollars  in  railways; 
yet  so  little  do  we  heed  the  significance  of  this  that 
our  popular  attitude  toward  this  twenty  billion 
dollars  of  railway  capital  is  one  of  resentment 
and  hostility,  and  we  normally  starve  it  into  a 
state  of  dilapidation. 

This,  then,  is  the  highly  complex  and  delicately 
adjusted  business  organization  we  are  operating 
in  America.  When  it  gets  out  of  adjustment  and 
slows  down,  as  all  complicated  machinery  does 
when  out  of  adjustment,  few  understand  what  has 
happened,  what  may  be  expected  to  happen  next, 
or  what  to  do  about  it,  and  there  is  much  suffering. 
Notwithstanding  such  examples  as  that  of  Russia, 
which  would  certainly  seem  to  carry  adequate 
warning  against  hasty  and  radical  attempts  to 
alter  the  existing  social  and  industrial  struo- 


24  THB  A  B  O'S  OP  BUSINESS  ^ 

ture,  every  period  of  temporary  industrial  dis- 
tress brings  forward  well-meaning  proposals  of 
unsound  economic,  financial,  and  political  doc- 
trines. Their  enactment  into  laws  is  urged  with 
all  the  zeal  and  courage  of  ignorance.  They  are 
gravely  dangerous  because  of  the  very  sincerity  of 
their  well-intending  advocates.  They  are  utterly 
incurable  except  by  education  in  business,  in  eco- 
nomics, in  sociology,  and  in  government. 


CHAPTER  II 

THE  MISUNDERSTANDING  OF  MONEY 

Pbobably  no  single  thing  has  done  so  much  to 
confuse  and  bewilder  ideas  about  business  as  the 
misuse  of  the  word  money;  and  not  merely  the 
misuse  of  the  word,  but  misunderstanding  of  the 
real  nature  of  the  thing  itself  and  its  place  and 
use  in  industry. 

It  is  the  habit  of  almost  every  man  to  consider 
himself  a  free  and  untrammeled  creature,  working 
quite  independently  at  some  monotonous  occupa- 
tion which  he  has  chosen  in  exchange  for  money. 
The  business  world  for  him  ends  there.  With  the 
money  he  goes  out  to  buy  things  from  strangers. 
The  doing  so  seems  to  him  a  separate  act,  being  in 
no  way  a  part  of  his  own  business  occupation. 
The  fact  is,  however,  that  in  buying  those  things 
he  is  merely  being  paid  for  his  own  work.  He  is 
simply  in  the  act  of  collecting  his  real  wages,  and 
finding  out  how  much  he  was  actually  paid.  He 
helped  to  produce  all  those  things  and  is  now  be- 
ing handed  his  share  of  what  all  joined  in  pro- 
ducing.   He  thought  he  had  been  paid  when  the 


26 

money  was  handed  to  him,  but  he  had  not  been. 
He  did  not  even  know  when  he  received  the  money 
how  much  he  was  being  paid.  He  only  learned 
the  amount  of  his  real  salary  when  he  finally  had 
it  handed  to  him  in  goods.  The  money  that  he 
was  temporarily  carrying  was  only  a  token  that 
entitled  him  to  go  to  various  shops  and  places  and 
collect  his  real  wages.  His  real  wages  were  just 
his  fair  proportion  of  all  the  various  goods  we 
had  all  joined  in  producing.  If  we  as  a  nation 
produced  much,  he  received  much.  If  we  only 
succeeded  in  producing  a  little,  or  if  we  wasted  a 
great  part  of  it  in  war  or  foolishness  or  incom- 
petence, then  his  share  became  less.  The  amount 
of  money  was  just  one  of  the  tools  used  in  indus- 
try. It  was  a  kind  of  conveyor  upon  which  his 
real  pay  was  carried  to  him  from  the  grocery 
store,  from  the  picture  theater,  or  from  the  doc- 
tor's office. 

He  could  elect  to  take  his  pay  in  anything  he 
pleased:  food,  clothes,  amusements,  services,  or 
he  could  save  his  money  and  decide  later,  but 
sooner  or  later  he  is  paid  in  things — ^not  in  money. 
The  fluctuations  that  have  taken  place  in  prices 
make  this  plainer  than  it  used  to  be.  The  man 
always  speaks  of  his  occupation  as  if  it  were  a 
thing  by  itself  and  the  aim  and  end  of  it  all  were 


THE   MISUNDEESTANDING   OF   MONEY  27 

to  exchange  it  for  a  fixed  amount  of  money.  The 
fact  is  that  the  man  is  really  taking  part  in  the 
production  of  nearly  everything.  If  a  banker 
loans  money  to  a  baker  to  buy  flour,  then  the 
banker  is  really  producing  bread.  When  the  phy- 
sician restores  the  health  of  a  temporarily  sick 
butcher,  he  is  not  practicing  his  dignified  profes- 
sion aboye  the  level  of  the  common  world;  he  is 
at  the  moment  producing  meat,  and  so  is  the  car- 
penter who  built  the  counter  in  the  butcher  shop. 
Of  course  the  surgeon  and  the  carpenter  cannot 
be  paid  directly  in  meat,  nor  the  banker  in  bread. 
To  meet  this  difficulty,  we  have  gradually  evolved 
and  adopted  the  practice  of  distributing  little 
metal  and  paper  tokens,  and  we  call  them  money 
and  have  certain  agreements  and  practices  about 
receiving  them  from  one  another  in  exchange  for 
goods. 

The  next  great  source  of  confusion  about 
money  is  our  loose  use  of  the  word,  our  failure  to 
understand  what  money  is  and  where  it  comes 
from.  Strictly  speaking,  the  only  money  in  Amer- 
ica is  gold  (a  limited  amount  of  silver,  unimpor- 
tant, however,  for  the  purposes  of  this  discus- 
sion). Of  this  gold  there  is  perhaps  three  billion 
dollars,  and  most  of  it  lies  in  bank  vaults,  for  the 
sole  purpose  of  being  used  to  pay  deposits  or 


28  THE   A  B   O'S   OF  BUSINESS 

notes  in  case  anybody  really  wants  them  paid  in 
actual  gold.  The  gold,  in  other  words,  is  held  in 
reserve  for  this  purpose,  and  so  these  great  stores 
of  it  have  come  to  be  spoken  of  as  bank  reserves. 
The  gold  used  in  this  way  renders  the  country  a 
money  service  probably  ten  or  twenty  times  as 
great  as  it  could  render  if  it  were  in  circulation 
from  hand  to  hand.  Prior  to  1914  this  gold  re- 
serve was  subdivided  among  about  twenty-five 
thousand  banks  in  the  United  States.  Since  the 
creation,  in  about  that  year,  of  the  Federal  Re- 
serve System,  each  of  these  twenty-five  thousand 
banks  (except  a  few  which  are  not  members)  has 
deposited  its  gold  in  the  nearest  Federal  Reserve 
Bank,  of  which  there  are  twelve,  with  branches. 
It  is  still  just  as  available  to  the  banks  as  before 
they  did  this  and  by  doing  so  they  have  multi- 
plied its  effectiveness.  So  that  there  is  a  great 
store  of  gold  in  the  vault  of  each  Federal  Reserve 
Bank. 

The  relation  between  a  Federal  Reserve  Bank 
and  the  surrounding  banks  in  its  district  is  prac- 
tically the  same  relation  that  exists  between  any 
bank  and  its  customers.  That  is  to  say,  a  bank 
carries  a  balance  on  deposit  with  the  nearest  Fed- 
eral Bank  and  also  borrows  from  it,  if  need  be, 
by  rediscounting  its  customers'  notes  at  the  Fed- 


THE  MISUNDEESTANDING  OF  MONEY  29 

eral  Reserve  Bank.  This  banking  machinery  so 
arranged  undoubtedly  constitutes  the  most  per- 
fect and  highly  developed  banking  system  in  the 
world;  also  the  most  powerful  in  the  service  it 
can  render. 

It  is  practically  true,  then,  that  the  only  real 
money  in  the  country  is  gold  and  its  amount  varies 
but  little  except  when  it  is  imported  or  exported 
in  settlement  of  trade  balances  with  foreign  coun- 
tries. Everything  else  that  we  speak  of  as  money 
is  in  reality  only  bank  credit.  The  amount  of  this 
is  very  great.  It  can  be  created  to  any  extent 
necessary,  subject  to  the  limitation  that  it  must 
not  be  created  beyond  the  ability  of  the  gold  re- 
serves to  redeem  it  upon  demand.  It  exists  in 
two  forms,  bank  notes  and  bank  deposits.  They 
differ  only  in  form.  They  are  the  same  thing  in 
substance  and  are  interchangeable.  Banks  bring 
it  into  existence  by  the  process  of  making  loans. 
The  borrowers  to  whom  the  loans  are  made  put 
it  out  of  existence  again  when  they  pay  the  loans. 
If  a  baker  needs  to  buy  $10,000  worth  of  flour  and 
his  bank  balance  is  exhausted,  he  borrows  that 
sum  from  the  bank.  The  prevalent  idea  of  this 
transaction  seems  to  be  that  the  banker  loans  him 
a  particular  $10,000  which  he  happens  to  have 
about  him,  probably  having  been  recently  brought 


30  THE  A  B  O'S  OF  BUSINESS 

in  in  money  by  some  opulent  depositor.  The  thing 
that  really  happens  is  that  the  baker  signs  a  prom- 
issory note  for  the  amount  and  the  banker 
makes  two  bookkeeping  entries.  He  charges 
'* Bills  Receivable/'  meaning  that  the  note  has 
now  passed  into  the  bank's  assets,  and  he  credits 
"Individual  Deposits/'  meaning  that  he  has 
placed  the  amount  of  the  note  to  the  credit  of  the 
baker's  account.  By  those  two  entries  the  bank's 
loans  increased  and  its  deposits  also  increased, 
each  by  the  sum  of  $10,000.  There  was  no  money 
used  in  the  transaction;  nothing  but  ink.  The 
bank  deposits  went  up.  The  baker  now  speaks  of 
having  money  in  the  bank.  It  is  not  money;  it 
is  bank  deposits  or  bank  credit.  The  circulating 
medium  in  this  country  is  not  money;  it  is  bank 
deposits.  It  is  created  as  in  the  last  transaction. 
It  circulates  by  the  use  of  the  bank  check.  The 
baker  hands  his  check  for  $10,000  to  a  flour  miller 
for  flour  and  his  bank's  total  deposits  go  down 
$10,000.  The  deposits  of  the  miller's  bank  go  up 
$10,000.  During  the  ensuing  month,  the  baker 
sells  bread  and  every  day  deposits  in  his  bank 
some  checks  given  to  him  for  bread  by  retail 
grocers.  When  his  balance  is  finally  built  up 
about  $10,000,  he  pays  his  note  by  giving  his  bank 


THE  MISTTHDEBSTASTDIKG  OF  MONET  31 

a  check  for  $10,000.  By  this  transaction  the 
bank's  loans  have  gone  down  $10,000  by  the  sur- 
render of  the  note,  and  its  deposits  have  gone 
down  $10,000  because  in  paying  the  note  the  baker 
reduced  his  balance  by  that  sum. 

By  such  transactions  as  this  do  bank  deposits 
rise  and  fall.  Men  see  them  rising  and  marvel  at 
where  all  the  money  is  coming  from.  There  is 
no  money  involved  in  it.  It  is  only  the  banks 
creating  for  the  use  of  business  men  new  supplies 
of  credit  that  did  not  exist  before.  If  they  need 
it  in  the  form  of  what  they  call  paper  money,  or 
currency,  for  perhaps  payroll  or  cash  drawer  pur- 
poses, it  is  all  the  same.  The  bank,  instead  of 
crediting  the  sum  to  the  customer's  deposit  ac- 
count, hands  him  bank  notes  instead,  but  it  is  the 
same  kind  of  bank  credit  in  substance.  It  is 
created  as  needed  and  retired  again  when,  after 
having  circulated  from  hand  to  hand  until  it  has 
served  its  purpose,  someone  brings  it  in  to  the 
bank  and  deposits  it  to  the  credit  of  his  account. 
By  this  latter  act  it  ceases  to  circulate  as  notes 
and  is  transformed  into  deposits.  The  amount 
of  bank  deposits  and  the  amount  of  bank  notes  in 
circulation  rise  and  fall  according  to  the  require- 
ments of  business.   These  are  not  money,  though 


32 

we  all  so  call  them.  They  are  redeemable  in 
money  on  demand  if  desired.  Their  limit  of  total 
expansion  is  controlled  by  the  amount  of  gold  in 
the  reserve  banks. 

Now  in  consequence  of  this  misunderstanding 
about  money,  a  strange  thing  took  place  among 
the  American  people  in  consequence  of  the  war 
financing.  By  reason  of  the  vast  war  transac- 
tions, principally  by  the  Government,  an  unpre- 
cedented amount  of  bank  credit  was  created.  The 
Government  expended  it  in  purchase  of  goods  and 
services,  and  thus  it  passed  into  general  circula- 
tion. Being  in  possession  of  so  much  money  we 
quite  naturally  felt  that  we  had  become  rich 
(money  being  our  popular  conception  of  riches) 
and  we  spent  it  accordingly.  The  fact  was  just 
the  opposite;  instead  of  growing  rich  we  were 
becoming  poor.  We  were  vaguely  conscious  of  a 
diminishing  supply  of  goods,  as  they  were  ab- 
sorbed into  the  waste  and  destruction  of  war,  but 
that  was  not  so  plainly  seen  as  was  the  abundance 
of  money.  Our  real  wealth  was  being  destroyed, 
but  so  long  as  money  was  plentiful  we  were  not 
only  complacent  but  actually  extrav£tgant.  The 
waste  of  war  has  cost  America  tens  of  billions, 
not  in  money  but  in  true  wealth.  We,  as  a  people, 
are  in  consequence  poorer  by  that  amount.    But 


THE   MISUNDBBSTAITDINQ  OP   MONEY  33 

the  excess  of  mere  money  that  was  given  to  us  in 
exchange  for  onr  goods  and  our  services  so  ob- 
scured the  fact  that  we  do  not  completely  realize 
it  yet. 


-.\ 


CHAPTER  III 

WAGES   AND  WEALTH 

Regarding  the  distribution  of  wealth,  there 
seems  to  be  need  of  a  clearer  understanding,  to 
be  derived  from  looking  at  the  essentials  rather 
than  at  the  mere  appearance.  Our  present  na- 
tional state  of  mind  seems  to  include  the  sincere 
belief  that  the  products  of  industry  are  not  being 
justly  apportioned  between  those  who  own  the 
plant  and  those  who  work  in  it.  We  think  the 
wages  of  labor  should  be  greater  and  the  returns 
upon  invested  capital  less.  (Naturally,  if  one  is 
to  be  greater,  the  other  must  be  less,|  since  we  can- 
not divide  more  than  we  produce?)  So  far  as 
can  be  discovered,  this  belief  is  more  a  matter  of 
sympathy  than  of  reasoning  and  calculation. 

Nothing  need  be  added  to  what  has  been  al- 
ready said  to  the  effect  that  wages  are  really 
paid  in  things,  not  in  money.  The  pay  envelope 
or  the  salary  check  may  not  be  exchanged  for 
goods  at  once,  but  until  it  has  been  the  holder  of 
it  has  not  yet  received  his  wage  and  does  not 
even  know  how  much  his  real  wage  is  to  be.    His 

34 


WAGES  AND  WEALTH  35 

true  wage,  in  the  only  form  in  which  he  can  use 
it,  consists  of  just  his  proportion  of  what  we  all 
produce  by  united  effort.  It  is  increased  or  di- 
minished accordingly,  as  we  produce  more  or  less. 
It  is  handed  to  him  in  the  form  of  money,  so  he 
can  choose  the  particular  things  in  which  he  wants 
the  world  to  pay  him.  Money  is  merely  one  of  the 
tools  of  industry,  like  a  monkey  wrench;  to  be 
picked  up  and  used  temporarily.  It  is  only  used 
in  accomplishing  the  exchange  of  things,  or  labor, 
for  other  things  or  other  labor,  and  then  passed 
on  to  someone  else  who  will  use  it  next.  The 
whole  question  is  one,  not  of  money,  but  of  goods. 
Our  whole  end  and  aim  in  industry  is  to  produce 
goods  and  divide  them  among  ourselves.  Our 
proportion  of  the  goods  produced  is  our  wage. 
Naturally,  these  wages  can  be  increased  only  by 
increasing  our  total  production  of  goods.  We 
cannot  divide  more  than  we  have. 

But  it  is  claimed  that  in  the  division,  the  pro- 
prietor of  capital,  the  owner  of  the  plant,  re- 
ceives too  much.  Some  of  us  object  to  much  profit 
going  to  him.  Good  salaries  to  the  superin- 
tendents, yes.  Perhaps  a  very  large  one  to  the 
general  manager,  who  plans  and  directs  it  all. 
But  what  to  the  proprietor,  who  merely  owns  it! 
If  he  gets  too  little,  most  of  the  capital  invested 


36  THE   A  B   O'S  OF  BUSINESS 

in  the  plant  will  be  lost  and  destroyed  just  as  com- 
pletely as  war  destroys  it.  If  his  plant  is  not 
allowed  a  fair  profit,  it  will  be  abandoned  and 
cease  to  produce  wealth.  No  one  will  operate  at 
a  loss.  If  he  gets  too  much,  alert  competitors  will 
do  everything  necessary  in  the  public  behalf.  But 
if  one  or  the  other  must  happen,  it  actually  seems 
far  more  to  the  public  benefit  that  he  should  get 
too  much.  Suppose  he  receives  every  year  a  very 
vast  income  in  money.  What  is  the  economic  func- 
tion of  the  capitalist  in  our  industrial  system! 
He  cannot  personally  consume  much  of  the  coun- 
try 's  goods.  He  eats  and  wears  probably  a  little 
more  than  the  rest  of  us.  He  wastes  the  services 
of  a  man  or  two  in  driving  a  car  for  his  pleasure 
and  beautifying  his  garden;  also  the  services  of 
a  couple  of  women  to  prepare  his  food  and  keep 
his  house  in  extra  nice  order.  A  little  more  wealth 
would  perhaps  be  produced  and  we  would  all  be 
richer  if  the  man  waited  upon  himself  and  re- 
leased these  employees  to  become  producers  on 
farms  or  in  other  creative  industry.  That,  how- 
ever, is  nearly  the  limit  of  his  wrongdoing.  In 
that  way  he  may  obtain  possession  of,  and  use  up, 
a  little  more  than  one  person  ^s  share  of  the  forty 
or  fifty  billion  dollars'  worth  of  goods  and  ser- 
vices that  we  all  (including  him)  united  in  pro- 


WAGES  AND  WEALTH  37 

ducing.  That  is  about  as  far  as  Nature  makes  it 
possible  for  him  to  go,  and  most  of  his  vast  income 
is  still  unspent.  It  may  be  that  this  man  ought 
to  live  after  the  style  of  a  penitent  monk  and  make 
his  life  a  drab  and  cheerless  period  of  frugality 
and  self-denial.  The  rest  of  the  world  would  be 
a  little  richer  by  the  saving  of  what  he  wastes. 

But  even  in  the  very  heaping  upon  him  of  this 
enviable  abundance  of  enjoyment  and  benefits,  it 
seems  that  Nature  has  served  a  beneficent  pur- 
pose. Desire  for  these  very  things,  kept  alive  by 
the  daily  reminder  that  they  are  within  reach  of 
the  successful,  is  the  main  force  that  drives  for- 
ward human  progress.  If  it  were  the  custom  for 
the  successful  to  live  on  a  meager  diet  in  dark 
tenements,  ten  million  eager  young  American  men, 
whose  promised  achievement  is  the  sole  hope  of 
our  future,  would  turn  their  backs  upon  all 
thoughts  of  success  and  embrace  idleness.  In 
view  of  these  things,  it  is  rather  remarkable  that 
some  legislature  has  not  repealed  this  law  of  Na- 
ture. As  a  people,  we  would  be  likely  to  carry  at 
the  polls  by  an  overwhelming  majority  a  referen- 
dum prescribing  hovels  and  rags  for  the  success- 
ful and  forbidding  enjoyment  except  as  the  re- 
ward of  failure. 

In  an  ideal  society,  such  as  may  be  attained  in 


38  THE   A  B   O'S   OP  BUSINESS 

time,  the  possessor  of  great  wealth  will  probably 
live,  as  many  now  do,  in  enough  comfort  and  en- 
joyment to  serve  the  useful  purpose  of  incentive 
to  success  among  the  rest  of  us,  but  without  abus- 
ing the  privilege  in  the  offensive  manner  prac- 
ticed by  so  many  of  our  rich  of  the  less  cultivated 
and  enlightened  type. 

Our  widespread  resentment  against  the  capital- 
ist, on  account  of  his  all-too-frequent  abuse  of 
personal  power  and  privilege,  has  so  confused  our 
ideas  that  we  include  in  this  resentment  the  very 
institution  of  capital  itself,  and  as  a  people  we 
retaliate  upon  capital  (a  thing)  because  we  dis- 
like the  occasional  capitalist  (a  person).  This 
very  confusion  of  thought  upon  the  subject  seems 
to  be  the  cause  of  most  of  our  disputes  about  cap- 
ital and  labor.  To  most  of  us  the  word  capital 
merely  suggests  the  brutal-looking  individual  pic- 
tured in  the  familiar  newspaper  cartoon.  He  is 
but  one  of  the  temporary  phases  in  our  great  in- 
dustrial progress;  acting  that  way  only  until  he 
learns  better,  and  doing  that  very  rapidly. 

The  word  capital  ought  to  suggest  to  our  mind 
no  individual  at  all,  but  something  like  a  railway, 
a  merchant  vessel,  a  telephone  system,  a  factory 
building  full  of  machinery,  a  harvesting  machine, 
a  steam  shovel,  or  a  screw  driver. 


WAGES  AND  WEALTH  39 

Bnt  why  should  all  the  capital  be  owned  by  a 
few  men?  In  the  first  place,  all  that  they  own  is 
bnt  a  trifling  part  of  the  vast  quantities  that  have 
been  produced.  The  rest  of  our  enormous  pro- 
duction we  have  consumed  or  destroyed  as  we 
went.  The  capital  now  in  existence,  even  great  as 
it  seems,  is  simply  the  relatively  small  remainder 
that  we,  as  a  people,  have  preserved.  It  is  in  the 
hands  of  those  who  now  hold  it  for  various  rea- 
sons. The  largest  of  them  are  trustees  we  have 
appointed  for  the  purpose,  such  as  life  insurance 
companies  and  savings  banks.  Every  holder  of 
an  insurance  policy  and  every  depositor  in  a  sav- 
ings bank  is  a  capitalist,  none  the  less  because  he 
wisely  leaves  the  management  of  his  capital  to 
the  company  or  the  bank.  So  is  every  owner  of  a 
farm,  a  home,  or  a  mortgage,  of  a  stock  of  mer- 
chandise, a  bond  or  a  share  of  stock,  a  motor  car 
or  a  set  of  tools.  The  stockholders  and  bondhold- 
ers of  our  railroads,  banks,  and  business  corpo- 
rations are  numbered  by  the  million.  Some  of  our 
railways  are  said  to  have  a  greater  number  of 
stockholders  than  employees.  Their  stocks  and 
bonds,  deeds  and  mortgages,  pass  books  and  in- 
surance policies,  are  merely  convenient  forms  of 
title  papers  which  evideja^jp  the  ownership  of 
ijapital  jiBelL 


40  THE  ▲  B  O'S  OF  BUSINESS 

We  are  a  nation  of  capitalists,  yet  hating  a 
thing  we  picture  to  ourselves  as  **capitaP';  ham- 
pering it  at  every  step  because  it  has  come  to  be 
represented  in  our  mind  by  the  occasional  million- 
aire with  rude  manners,  foolishly  extravagant 
habits,  and  a  tyrannical  disposition  to  misuse  his 
power.  Millionaires  of  this  type  do  exist. 
People  exactly  like  them  by  nature  are  also  just  as 
numerous  in  most  other  branches  of  society.  But 
the  flagrant  and  objectionable  thing  about  the 
capitalist  is  that  he  owns  the  plant  and  derives  a 
very  great  income  from  it. 

There  are  those  who  claim  he  is  not  entitled  to 
this  income  in  the  first  place.  If  so,  then  it  should 
be  distributed,  upon  some  just  principle,  among 
the  rest  of  us.  We  are  reliably  told  by  statisti- 
cians that,  if  this  were  done  with  all  the  large  in- 
comes in  America,  the  average  person  would  re- 
ceive but  a  trifling  pittance.  So  that  even  if  we 
were  entitled  to  have  that  done,  it  would  not  bene- 
fit us  appreciably.  Being  a  small  sum  for  each  of 
ns,  we  would,  of  course,  spend  it,  with  rare  excep- 
tions. 

But  failing  to  distribute  his  surplus  income  in 
that  way,  the  capitalist  must  find  some  other  dis- 
position of  it.  Being  like  the  rest  of  us,  his  nat- 
ural impulse  will  be  to  try  to  make  more  money 


WAGES  AND  WEALTH  41 

with  it.  This  will  generally  take  the  form  of  loan- 
ing it  to  whomever  will  pay  him  the  most  interest 
for  its  use.  The  man  who  can  afford  to  pay  the 
most  for  it  is  necessarily  going  to  be  the  man 
who  can  make  it  produce  the  most.  Generally 
speaking,  that  will  cause  it  to  be  employed  in 
producing  something  the  world  will  pay  a  high 
price  for,  just  for  the  very  reason  that  that  par- 
ticular thing  is  at  that  moment  the  world 's  great- 
est and  most  pressing  need.  Therefore,  the  nat- 
ural motive  of  private  selfishness  on  the  part  of 
the  capitalist  causes  the  world's  surplus  capital 
to  be  applied  where  it  will  do  the  world  the  most 
good.  It  was  new  capital,  created  and  left  un- 
spent during  the  preceding  year.  It  was  saved  by 
the  capitalist,  just  because  there  was  no  way  in 
which  he  could  spend  it.  He  loaned  it  to  a  man 
with  ideas,  courage,  and  enterprise,  who  built  with 
it  perhaps  a  new  factory  that  did  not  exist  before. 
This  factory  then  began  to  produce  new  goods 
that  could  not  otherwise  have  been  produced.  It 
competed  with  older  factories  for  the  services  of 
workmen  and  probably  raised  their  wages  in 
order  to  get  them.  It  reduced  the  cost  of  living  by 
increasing  the  quantity  of  goods. 

The  capitalist,  in  all  this,  seems  to  have  done  no 
harm  and  to  have  been  the  innocent  and  unsuS' 


42  THE  A  B  C'S  OF  BUSINESS 

pecting  tool  of  a  great  natural  force,  of  which  he 
was  not  even  aware.  When  asked  what  he  did 
with  his  income,  he  probably  did  not  fully  realize 
that  in  obedience  to  a  natural  law  he  had  put  it 
back  into  the  enlargement  of  productive  industry ; 
he  probably  just  said  that  he  bought  bonds  with 
it.  That  was  the  form  it  took  to  him.  He  does  not 
know  it,  but  in  reality  organized  society  has  grad- 
ually evolved  him  and  set  him  up  as  an  institu- 
tion for  providing  ourselves  with  more  machinery 
and  tools  with  which  to  produce  wealth. 

Now  why  could  not  all  his  income  have  gone 
to  the  rest  of  us  or  to  the  workmen,  and  still  have 
been  invested  in  the  bonds  just  the  same,  but  thus 
permitting  the  bonds  to  be  widely  owned  among 
us  all,  instead  of  so  much  of  it  going  to  one?  If 
that  had  been  done  and  every  one  of  us  had  saved 
the  trifling  sum  we  thus  received  and  had  bought 
the  bonds  with  it,  then  it  is  true  that  we  would 
have  reached  the  happy  situation  all  sympathetic 
people  hope  for  in  behalf  of  labor.  But  the 
amount  coming  to  each  of  us  would  be  so  small 
we  would  surely  consume  instead  of  saving  it. 
Virtually  none  would  be  saved.  Hence  no  new 
capital  would  be  created.  Hence  industrial  prog- 
ress would  cease.  Stagnation  and  decay  would 
follow.    The  production  of  goods  would  decline, 


WAGES  AND  WEALTH  43 

prices  rise,  and  poverty  ensue.  To  be  sure,  we 
would  all  have  received  for  one  or  two  years  this 
trifling  increase  in  our  yearly  income  and  would 
have  enjoyed  spending  instead  of  saving  it,  but 
what  would  that  avail  us  when  we  saw  our  whole 
industrial  plant,  railways,  factories  and  all,  de- 
caying into  unproductive  ruin  for  lack  of  the  capi- 
tal no  one  had  saved?  In  other  words,  our  indus- 
trial life  will  decay  into  ruin  if  new  capital  is  not 
continuously  put  into  it.  The  only  new  capital 
obtainable  is  what  may  be  saved  out  of  our  total 
current  production  of  wealth  as  we  produce  it. 
Most  of  us  consume  our  entire  share  and  will  not 
save.  A  very  high  authority  recently  said,  in  sub- 
stance, that  if  the  two  million  railway  employees 
in  America,  who  receive  about  fifteen  hundred 
dollars  per  year  each,  would  set  aside  fifty  dol- 
lars each,  they  could,  with  the  total  so  saved,  buy 
a  controlling  interest  in  the  outstanding  capital 
stock  of  the  New  York  Central  Railway  System, 
and  if  they  would  each  save  fifty  dollars  per  year 
they  could,  in  five  years,  buy  a  like  control  of  all 
the  railway  systems  extending  from  Chicago  to 
the  Atlantic  seaboard.  No  one  expects  them, 
however,  to  do  this,  or  to  save  at  all  except  in  rare 
instances. 
The  capitalist  is  the  fruit  of  our  industrial  ex- 


44  THE   A  B   C'S   OF  BUSINESS 

perience.  He  is  the  only  contrivance,  except  the 
savings  bank  and  the  insurance  company,  by  the 
use  of  which  we  have  succeeded  in  accumulating 
much  capital ;  and  it  is  only  by  obtaining  and  using 
capital  that  we  have  risen  out  of  the  cave  and  the 
wigwam.  It  has  been  proved  that  the  only  way 
we,  as  a  people,  can  save  enough  capital  to  insure 
the  continuance  of  our  industrial  life  is  to  put  so 
much  income  into  the  hands  of  one  man  that  he 
cannot  consume  or  destroy  it,  and  thus  cannot  help 
saving  it.  After  saving  it  there  is  no  place  it  can 
go  except  into  industry.  In  this  way  we  get  it 
saved,  which  is  the  important  thing  to  America  as 
a  whole.  Just  who  saves  it  does  not  matter  much. 
Saved  and  employed  in  productive  industry,  it 
serves  all  of  us  about  equally  well,  no  matter  who 
owns  it. 

The  obstacle,  then,  to  an  equal  distribution  of 
wealth  is  simply  our  lack  of  intelligence  and  thrift. 
Wealth  drifts  into  the  hands  of  the  few  because 
the  many  will  not  save  it,  even  if  paid  to  them. 
In  the  hands  of  a  few,  it  is  actually  saved  because 
there  is  no  way  for  them  to  waste  so  much  of  it. 
In  this  way  the  drifting  of  great  wealth  into  the 
hands  of  a  few  is  really  the  only  thing  that  saves 
us  from  industrial  ruin.  It  seems  to  be  a  scheme 
contrived  for  us  by  Nature,  because  it  is  fool- 


WAGES  AND   WEALTH  45 

proof.  It  is  not  perfect.  It  has  abuses.  We  have 
not  succeeded  very  well  in  correcting  many  of 
them  by  law;  perhaps  Nature  will  correct  even 
those  for  us  in  time.  The  system  has  worked  well. 
Upon  it  we  have  become  a  great,  rich,  powerful, 
moderately  contented  people.  Until  the  war  all 
classes  of  us  have  been  steadily  becoming  better 
off,  as  we  have  perfected  and  enlarged  our  indus- 
trial plant  and  made  it  produce  more  and  more 
goods  for  our  consumption. 

After  all  our  abuse  of  the  capitalist,  we  shall 
some  day  learn  that  he  is  an  innocent  part  of  our 
highly  complicated  organization^  put  there  by 
Nature  to  render  us  a  useful  and  valuable  service. 
If  we  destroyed  him  or  any  other  essential  part 
of  our  industrial  machinery  as  it  exists,  we  would 
come  to  dire  grief,  just  as  they  have  done  in 
Russia.  The  existing  system,  if  let  alone,  wiU 
slowly  but  steadily  benefit  us  all.  Some  day  we 
shall  come  to  understand  it,  and  when  we  do  we 
can  make  it  far  more  productive.  This  view  may 
be  mistaken  as  being  a  plea  in  behalf  of  capital 
and  against  labor.  It  is  just  the  opposite  of  that. 
It  is  a  plea  in  favor  of  the  greatest  possible  accu- 
mulation of  capital  for  the  use  and  benefit  of 
labor,  by  the  only  method  that  can  be  employed 
until  labor  has  learned  to  save  and  to  invest. 


46  THE  A  B  O'S  OF  BUSINESS 

As  opposed  to  this  view,  there  is  set  up,  by 
champions  of  the  supposed  cause  of  labor,  merely 
a  blind  demand  for  more  wages.  Probably  all 
right-thinking  people  cordially  desire  that  labor 
shall  receive  more  wages;  but  proposals  to  pay 
them  by  depleting  our  capital,  already  heavily  de- 
pleted by  war,  are  simply  proposals  that  we  shall 
eat  up  our  tools  and  machinery  and  go  back  to 
producing  with  our  naked  hands.  They  are  pro- 
posals that  rest  merely  upon  sympathy  for  labor, 
and  it  has  been  wisely  observed  that  sympathy 
without  understanding  is  always  ineffectual  and 
usually  injurious. 

A  demand  for  increased  wages  does  not  merely 
raise  a  question  between  the  employee  and  his  em- 
ployer. It  is  really  a  demand  made  upon  all  of 
us,  that  this  particular  employee  shall  receive  a 
larger  proportion  of  what  the  entire  American 
business  organization  produces,  though  it  calls 
upon  his  particular  employer  to  get  it  for  him. 
The  employer  can  do  this  only  by  trading  off  the 
goods  he  makes  for  a  larger  quantity  of  the  kind 
of  goods  the  rest  of  us  make.  He  does  this  by 
raising  his  price,  because  money  has  to  be  used 
in  doing  it  and  so  it  all  has  to  be  expressed  and 
talked  about  in  terms  of  money.  But  the  claim  is 
that  the  employer  should  not  raise  the  selling 


WAGBS  AND  WEALTH  47 

pnce  of  his  goods,  but  should  pay  increased  wages 
by  correspondingly  reducing  the  amount  which  he 
has  been  receiving  as  interest  upon  the  capital  in- 
vested in  his  plant. 

No  one  wants  him  to  get  too  large  a  return  upon 
the  capital  invested  in  his  plant  and  if  he  tries  to 
and  succeeds  for  a  while,  the  economic  law  will 
punish  him  for  it.  He  cannot  possibly  conceal 
from  an  alert  world  the  fact  that  his  business  is 
yielding  attractive  profits,  and  enterprising  in- 
vestors will  promptly  enter  the  same  business  to 
secure  them  also.  It  is  a  fortunate  law  that  draws 
capital  where  the  most  can  be  earned  upon  it,  be- 
cause, in  the  long  run,  that  results  in  its  being 
employed  in  industries  that  are  the  most  produc- 
tive of  new  wealth  and  withdrawn  from  those 
which,  producing  the  least,  are  of  the  least  public 
value.  Perhaps  two  or  three  new  establishments, 
in  addition  to  the  one  that  is  making  too  much 
profit,  might  suffice  to  furnish  enough  competi- 
tion to  bring  the  profits  down  to  normal,  but  when 
two  or  three  discover  the  opportunity  perhaps 
twenty  or  thirty  do  also.  They  all  consequently 
enter  that  particular  business  at  once,  and  com- 
petition among  them  to  make  and  sell  the  same 
commodity  forces  down  the  price  of  it,  and  so  the 
abnormal  profits  the  original  employer  had  been 


48  THE  A  B  C'S  OP  BUSINESS 

making  are  taken  from  him.  And  when  his  com- 
petitors entered  the  business  and  had  completed 
their  buildings  and  installed  their  machinery,  they 
cast  envious  eyes  upon  his  experienced  employees 
and  got  them  by  paying  them  the  increased  wages 
which  they  knew  the  abnormal  profits  of  the  busi- 
ness would  make  possible.  Especially  was  this 
true  of  the  employees  who  were  conspicuously 
worth  the  most  by  virtue  of  intelligence,  character, 
and  industry. 

The  natural  laws  of  industry,  under  which  our 
entire  nation  has  been  gradually  built  up  to  its 
present  greatness,  are  apparently  so  comprehen- 
sive that  they  in  due  course  invariably  compel 
every  man  and  every  industry  to  pursue  a  course 
that  is  in  the  interest  of  public  welfare.  As  a  peo- 
ple, we  are  slowly  beginning  to  perceive  this  and 
to  grant  ready  approval  to  the  new  slogan,  **He 
profits  most  who  serves  best." 

Suppose,  now,  that  our  employer,  unable  justly 
and  fairly  to  raise  the  selling  price  of  his  com- 
modity, nevertheless  timidly  yielded  to  the  de- 
mand of  his  employees  for  higher  wages — a  de- 
mand upon  him  that  was  unjust  because  it  took 
away  from  him  a  fair  return  upon  his  actual  and 
real  capital  invested  in  his  plant.  He  would  con- 
sequently be  unable  to  pay  the  usual  dividend 


WAGES  AND  WEALTH  49 

upon  his  stock,  or  perhaps  even  the  interest  upon 
his  outstanding  bonds.  The  owners  of  the  stock 
would  see  it  fall  at  once  in  public  estimation,  or 
market  price,  to  perhaps  a  fraction  of  its  former 
value.  The  savings  bank  or  life  insurance  com- 
piany  which  had  bought  his  bonds  (these  institu- 
tions being  the  greatest  of  all  investors  and  simply 
investing  funds  they  hold  in  trust — perhaps, 
among  others,  funds  of  his  very  employees)  would 
also  feel  an  immediate  loss  upon  them  of  a  sub- 
stantial part  of  the  investment.  Having  defaulted 
in  the  payment  of  interest  upon  his  bonded  debt, 
the  employer's  credit,  at  his  bank  and  elsewhere, 
would  be  at  once  destroyed  and,  being  deemed  un- 
safe and  so  deprived  of  credit,  he  must  reduce 
the  output  of  his  business  down  to  a  volume  he 
can  pay  for  with  his  actual  cash.  On  so  dimin- 
ished a  volume  of  business,  his  cost  per  unit  of 
product  would  be  increased  and  his  losses  thus 
become  greater.  The  employer  having  defaulted 
in  the  interest  upon  his  bonds,  the  bondholders 
would,  of  course,  foreclose  their  mortgage  upon 
his  plant.  The  value  of  his  capital  stock  would 
thus  be  wholly  wiped  out  as  a  complete  loss.  The 
plant,  having  been  proved  unprofitable  and  hence 
worth  little,  would  be  sold  under  foreclosure.  The 
bondholders  would  receive  only  what  the  plant 


50 

sold  for  under  foreclosure  and  thus  sustain  a  par- 
tial loss.  The  plant,  being  proved  incapable  of 
earning  a  profit,  would  be  closed,  for  of  course  no 
one  would  operate  it  for  pleasure  or  just  to  pro- 
duce losses.  This  being  plain  to  everyone,  it 
would  have  been  bought  at  foreclosure  sale  by  a 
speculator  in  junk  who  would  sell  the  machinery 
for  scrap  and  dispose  of  the  building  to  someone 
for  a  warehouse.  The  employees,  who  had 
thought  capital  ought  not  to  receive  a  just. return, 
would  be  seeking  employment  elsewhere,  perhaps 
to  do  the  same  thing  again,  because  about  this 
chain  of  events  they  had  not  the  slightest  under- 
standing. 

Suppose,  now,  that  the  invested  capital  in  the 
plant  received  a  large  return,  large  enough  to  give 
the  employer  high  credit  and  yet  not  large  enough 
to  excite  the  cupidity  of  others  and  attract  dis- 
astrous competition.  Being  successful,  and  so  hav- 
ing the  confidence  of  the  public,  of  the  investors 
and  of  his  bankers,  he  could  give  to  the  business 
(and  to  the  world)  many  benefits.  He  could  bor- 
row new  capital  on  favorable  terms  to  install  bet- 
ter machinery  or  to  enlarge  the  plant.  He  could 
secure  ample  credit  at  low  discount  rates  to  carry 
on  a  large  volume  of  business.    Having  by  these 


WAGES  AKD  WEALTH  51 

methods  lowered  the  cost  per  unit  of  his  product, 
he  could  render  the  highest  of  all  business  ser- 
vices, that  is,  to  serve  the  world  with  more  and 
better  things  at  less  cost.  By  a  perfectly  wise  and 
just  apportionment  of  what  he  had  thus  saved,  he 
could  do  this  and  also  distribute  higher  wages  and 
increase  his  own  profits  beside. 

America  is  well  provided  with  men  who  possess 
sound  ideas  and  meritorious  plans  which  are  lying 
unutilized.  Vast  projects  which,  if  realized,  would 
be  capable  of  producing  much  wealth  and  of  fur- 
nishing abundant  employment  for  labor,  lie  dor- 
mant. The  reason  usually  assigned  for  our  fail- 
ure to  carry  such  projects  forward  is  that  we  can- 
not get  the  money.  In  truth  there  has  been  no 
scarcity  of  money  (using  the  word  in  the  ordi- 
nary sense)  but  recently  rather  too  great  an  abun- 
dance of  it.  The  thing  really  needed  and  really 
scarce  is  capital.  It  is  capital  of  which  we  have 
not  enough,  because  we  have  not  saved  any  con- 
siderable part  out  of  our  immense  annual  pro- 
duction. It  is  for  lack  of  capital  that  the  whole 
world  stagnates,  and  yet  we  hear  constant  clamor 
for  dividing  the  little  that  there  is  among  work- 
men in  increased  wages  to  spend. 

America,  just  because  it  among  the  nations  pos- 


52  THE  A  B  C'S  OF  BUSINESS 

sesses  capital  in  comparative  abundance,  is  glori- 
fied throughout  the  world  as  the  only  rich  and 
prosperous  country.  Europe  (though  flooded 
with  the  thing  we  call  money)  is  destitute,  because 
its  capital  has  been  dissipated  by  war  and  waste. 
We  are  called  upon  by  all  the  world  to  loan  it 
capital  and  yet  we  ourselves  need  infinitely  more 
than  we  have.  Had  we  but  sufficient  capital  in 
the  form  of  tools,  factories,  power  plants,  and 
current  wealth  seeking  investment  in  more  of  such 
equipment,  new  enterprise  would  spring  forward 
and  we  could  produce  such  an  annual  abundance 
as  would  give  every  workman  high  wages  indeed, 
in  the  form  of  better,  cheaper,  and  more  plentiful 
subsistence. 

But  instead  of  seeking  relief  properly  by  con- 
serving our  capital,  we  do  the  opposite.  In  a 
futile  attempt  to  stimulate  industry,  we  encourage 
the  undertaking  of  unnecessary  and  often  unpro- 
ductive public  expenditures  by  states  and  munici- 
palities, as  being  a  good  thing  to  do  during  hard 
times  by  way  of  furnishing  employment.  If  the 
mere  furnishing  of  employment  were  the  goal, 
men  could  be  employed  to  swing  Indian  clubs,  but 
it  should  hardly  be  done  in  preference  to  swinging 
hammers  in  productive  industry;  and  yet  we  de- 
liberately impede  our  own  progress  toward  eco- 


WAGES   AND   WEALTH  53 

nomic  recovery  with  vast  offerings  of  state,  munic- 
ipal, and  other  public  bonds,  to  compete  in  the 
market  for  capital  against  productive  industry, 
which  is  starving  for  the  lack  of  it. 


CHAPTER  IV 

THE  ELEMENTS  OF  BANKING 

Until  recent  years,  banking  seems  to  have  been 
considered  purely  a  private  enterprise,  conducted 
principally  for  profit,  after  the  manner  of  pri- 
vate business  in  general,  little  regard  being  paid 
to  the  idea  that  a  bank  owed  any  duties  to  its  cus- 
tomers other  than  to  be  honest,  to  publish  true 
statements  of  its  condition,  and  submit  to  govern- 
ment examination.  The  more  modem  view  seems 
to  be  that  banking  is  a  public  service.  This  being 
undoubtedly  the  correct  view,  it  seems  important 
that  the  nature  of  the  business  should  be  more 
widely  understood  and  the  obligations  of  banks 
and  customers  to  one  another  more  clearly  defined, 
and  that  every  customer  of  a  bank  should  fully 
understand  what  service  he  and  the  other  cus- 
tomers are  now  receiving  and  have  a  right  to  ex- 
pect from  the  bank;  and  also,  what  the  bank's 
rights  are.  This  is  all  pretty  well  established  by 
customs  which  are  the  outgrowth  of  experience, 
but  they  are  poorly  defined  at  best  and  the  rea- 
sons for  them  are  not  universally  understood. 

54 


THE  ELEMENTS   OF  BANKING  55 

The  operations  of  savings  banks  are  much  sim- 
pler than  those  of  commercial  banks.  In  reality, 
a  savings  deposit  should  be  classified  as  an  invest- 
ment rather  than  as  a  bank  account.  A  savings 
bank  is  not  so  much  a  bank,  in  the  broad  sense,  as 
it  is  a  standard  public  investment.  The  wise  in- 
vestment of  money  is  an  art  which  few  live  long 
enough  to  learn.  The  average  investor  has  to  deal 
with  small  sums,  in  odd  amounts,  and  at  irregular 
intervals.  He  is  without  experience  or  education 
in  the  selection  of  investments  and,  too,  there  are 
almost  no  suitable  investments  for  such  sums.  In 
trying  to  find  them  the  investor  usually  loses  at 
least  part  of  the  money.  It  may  be  said  that  he 
buys  experience,  but  without  buying  enough  of  it 
to  do  him  much  good.  The  savings  bank  affords 
him  an  immediate  investment  for  any  amount, 
large  or  small,  even  including  the  odd  cents,  and 
it  bears  interest  from  the  date  of  deposit.  It  is  a 
safe  investment,  requires  no  investigation  or 
study,  pays  almost  as  high  an  income  as  the  very 
highest  grade  of  investments  pay  the  world  over, 
and  can  be  converted  into  money  upon  reason- 
able notice,  and  without  loss  or  shrinkage. 

To  maintain  an  institution  that  affords  the  pub- 
lic this  kind  of  an  investment  for  its  savings  as 
they  accumulate,  is  a  suflScient  public  service,  and 


56  THE   A  B   C'S   OF   BUSINESS 

the  savings  bank's  duties  to  the  customer  end 
here.  The  permanent  nature  of  these  savings  de- 
posits and  the  necessity  for  paying  liberal  interest 
upon  them,  allow,  and  even  require,  that  the  bank 
shall  place  them  in  investments  of  a  rather  per- 
manent character,  and  it  necessarily  results  from 
this  that  the  depositor  could  not  reasonably  ex- 
pect to  withdraw  his  deposits  (even  though  occa- 
sionally allowed  to  do  so  in  moderation)  without 
giving  ample  notice;  and  neither  should  the  sav- 
ings depositor  consider  that,  in  addition  to  receiv- 
ing interest,  his  deposits  in  a  savings  institution 
give  him  any  implied  or  preferential  right  to  bor- 
row from  it  or  expect  it  to  perform  other  ser- 
vices for  him,  such  as  paying  his  checks,  keeping 
his  accounts,  or  collecting  his  debts. 

The  commercial  or  business  bank  is  a  totally 
different  style  of  institution.  Its  relationship  to 
the  community  and  its  customers  is  far  more  in- 
volved, more  intimate,  and  not  so  generally  under- 
stood, and  must  needs  be  discussed  at  greater 
length.  It  is  the  kind  of  institution  people  have 
in  mind  who  speak  of  banking  as  being  the  hand- 
maid of  commerce.  It  is  more  often  than  not  the 
familiar  thing  we  know  as  a  National  Bank.  Its 
oflSce,  in  our  scheme  of  business  organization,  is 
to  supply  credit  required  temporarily  in  trans- 


THE  ELEMENTS  OF  BANKING  57 

forming  one  kind  of  goods  into  another  kind  and 
in  transferring  goods  from  one  owner  to  another 
one.  From  an  economic  viewpoint,  the  service  of 
a  bank  (meaning  always  a  commercial  bank)  is 
not  unlike  the  service  rendered  by  a  railway.  It 
furnishes  credit  on  which  goods  are  carried  for 
short  periods. 

Most  of  the  confusion  of  thought  about  banking, 
of  which  there  is  a  great  deal,  is  due  to  the  way  in 
which  we  use  the  word  **  money '*  when  we  really 
mean  credit.  One  speaks  of  his  bank  balance  as 
money  in  the  bank.  It  is  not  money ;  it  is  a  debt 
the  bank  owes  him,  payable  in  money  if  desired. 
It  is,  strictly  speaking,  bank  credit.  If  he  draws 
it  out  and  is  paid  in  bank  notes,  those  also  are 
bank  credit.  Bank  deposits  and  bank  notes  are 
entirely  alike  in  substance  and  effect.  They  dif- 
fer only  in  form.  Neither  one  of  them  is  money. 
Correctly  speaking,  the  only  money  there  is  in 
America  is  held  in  reserves  to  redeem  the  Na- 
tional Bank  notes,  Federal  Eeserve  notes,  and 
bank  deposits,  which  are  our  real  circulating  me- 
dium. These  latter  are  all  credit  instruments.  By 
creating  them  and  using  them  as  money,  we  find 
it  possible  to  provide  ourselves  with  all  the  so- 
called  money  our  business  uses  require.  We  can 
create  as  much  of  it  as  necessary,  if  we  do  not 


58 

expand  it  too  much  in  proportion  to  our  gold  re- 
serve. It  circulates  freely  among  us  at  par,  be- 
cause we  know  it  can  and  will  be  redeemed  in  gold 
if  desired. 

Bank  credit,  then,  is  really  the  principal  cir- 
culating medium  of  exchange.  Its  destruction 
would  entail  consequences  impossible  to  imagine. 
Even  a  slight  contraction  of  it  (the  condition  com- 
monly spoken  of  as  tight  money)  threatens  a  busi- 
ness convulsion.  Banks  create  it  by  exchanging 
their  own  credit,  which  is  good  anywhere,  for 
their  customers'  credit,  which  must  be  good  but 
is  so  little  known  that  it  will  not  circulate.  The 
customer's  credit  is  simply  converted  into  bank 
credit  by  an  exchange  of  papers  and  a  book  entry. 
The  customer  speaks  of  this  bookkeeping  balance, 
created  in  this  simple  way,  as  money  in  the  bank. 
Inside  the  bank,  however,  the  language  is  differ- 
ent. The  thing  the  customer  calls  **  money  in 
bank,''  the  banker  calls  his  ** deposit  liability." 
To  him  it  is  not  money,  but  a  debt  he  must  pay 
whenever  the  checks  are  presented.  He  must  not 
create  too  much  of  it.  He  cannot  go  on  increas- 
ing it  indefinitely.  The  limit  is  fixed  by  the 
amount  of  real  money  that  can  be  kept  in  the  bank 
reserves.  This  limit  is  severely  contracted,  when- 
ever the  timid  and  the  ignorant  draw  gold  from 


THE  ELEMENTS   OF  BANKING  59 

the  bank  and  hoard  it  or  use  it  in  circulation.  It 
can  be  increased  only  by  depositing  more  coin  in 
the  banks,  or  by  contriving  improvements  in  the 
banking  system  that  will  make  the  cash  reserves 
more  efficient  and  capable  of  supporting  safely  a 
larger  amount  of  bank  credit. 

Exactly  the  latter  was  accomplished  by  the  es- 
tablishment of  the  Federal  Reserve  Banks.  In  a 
general  way,  these  institutions  do  for  the  national 
banks  just  what  the  banks  are  doing  for  their 
customers.  They  thus  greatly  increase  the  bank- 
ing power  of  the  entire  system.  They  hold  most 
of  the  cash  reserves  of  the  country  and  thus  make 
them  always  available  where  most  needed,  so  that 
a  bank  which  has  for  the  moment  a  heavier  credit 
demand  than  its  reserves  will  support  can  con- 
vert some  of  its  loans  into  reserves  at  the  Fed- 
eral Reserve  Bank  until  the  pressure  is  relieved. 

The  banks  of  a  city  lose  deposits  when  the  peo- 
ple of  that  city  are  buying  from  the  outer  world 
more  than  they  are  selling  to  it,  and  consequently 
paying  out  (through  their  banks)  more  than  they 
are  taking  in ;  or,  in  other  words,  when  the  balance 
of  trade,  or  money  movement,  visible  and  invis- 
ible, is  against  that  city.  The  balance  of  trade  or 
money  movement  against  a  city  must  be  paid  by 
the  banks  of  that  city  out  of  their  reserves  at  the 


60  THE  A  B   O'S   OF   BUSINESS 

Federal  Reserve  Bank.  Formerly  (before  the 
Federal  Reserve  Act)  this  loss  of  reserves  com- 
pelled them  to  shrink  the  amount  of  their  loans. 
This  resulted  in  what  is  called  tight  money  in  that 
city.  Money  being  tight  (that  is,  borrowers  un- 
able to  obtain  bank  credit)  business  men  were 
compelled  to  restrict  business  activities  which  in- 
volve expenditures  and  purchases;  and  when,  in 
consequence  of  this,  the  purchases  from  outside 
the  city  had  been  sufficiently  reduced  so  that  the 
balance  of  trade  turned  again  and  became  favor- 
able to  the  city,  the  lost  reserves  came  back  to  the 
banks  and  they  were  then  enabled  to  again  ex- 
pand their  credits  by  making  new  loans.  All  this 
was  unnecessary  and  highly  injurious.  It  was 
simply  due  to  our  former  inadequate  banking 
laws.  In  contrast  with  such  conditions,  the  great 
benefit  of  the  Federal  Reserve  System  becomes 
easily  evident  as  the  banks  of  any  city,  if  they 
are  members  of  the  Federal  Reserve  System,  are 
now  able  to  tide  over  a  temporary,  or  seasonal,  un- 
favorable trade  balance  of  this  kind  by  tempo- 
rarily rediscounting  some  of  their  paper  at  the 
Federal  Reserve  Bank,  thereby  replenishing  their 
reserves  out  of  the  immense  reserves  the  Federal 
Reserve  banks  hold  for  just  such  purposes,  and 
thus  are  able  to  avoid  subjecting  the  entire  city 


THE  ELEMENTS  OP  BANKING  61 

to  the  evils  of  a  sudden  contraction  of  the  circulat- 
ing medium.  From  this  it  is  apparent  that  each 
bank  is  compelled  to  see  that  the  loans  it  makes 
to  its  customers,  so  far  as  possible,  are  of  a  kind 
that  will  be  eligible  for  rediscount  at  the  Federal 
Eeserve  Bank. 

It  is  said,  then,  that  banks  constitute,  or  ren- 
der, a  public  service.  They  create  and  furnish  to 
the  public  a  circulating  credit  more  useful  and 
convenient  than  money  and  several  times  greater 
in  amount  than  the  total  money  supply  of  the 
country.  A  customer  obtains  this  credit  from  his 
bank  by  exchanging  with  the  bank  his  own  note 
for  the  bank's  credit,  in  the  manner  described. 
To  become  entitled  to  this  privilege,  he  must  es- 
tablish his  own  credit.  He  must  satisfy  the  bank 
that  his  own  note  is  good,  and  otherwise  do  his 
part  in  strengthening  and  supporting  this  entire 
credit  system.  The  very  foundation  of  the  cus- 
tomer's credit  is  knowledge  by  the  bank  that  he 
is  the  kind  of  man  who,  if  he  gives  his  note  or 
promise,  will  certainly  perform  it.  It  rests,  in 
other  words,  uponr  character,  without  which,  of 
course,  no  credit  can  exist.  He  must  next  satisfy 
the  bank  that  he  not  only  intends  to,  but  is  able 
also  to,  pay;  and  not  merely  pay  sometime,  but 
pay  when  the  note  is  due.    This  is  partly  accom- 


62 

plished  either  by  depositing  security  with  the  bank 
or  giving  it  a  correct  detailed  written  statement 
of  his  business  condition  and  the  nature  of  his 
business  operations.  It  is  even  usual  now  that 
this  statement  shall  be  certified  by  an  independent 
auditor  or  accountant. 

But  even  to  customers  who  meet  these  require- 
ments, the  bank  can  only  extend  a  total  credit 
which  is  limited  by  its  total  cash  reserves,  and 
these  can  be  increased  only  by  actual  money  which 
comes  to  the  bank  from  newly  coined  supplies, 
from  other  cities,  other  banks,  or  from  private 
hoards ;  and  being  thus  limited,  the  bank  must  so 
deal  with  all  its  customers  as  to  make  its  total 
available  supply  of  credit  go  around  among  them 
equitably.  No  customer,  then,  should  be  allowed 
to  borrow  more  than  his  fair  proportion.  This  is 
measured  by  what  he  does  to  support  and  assist 
the  bank.  The  simplest  evidence  of  this  is,  of 
course,  the  amount  of  the  average  balance  he 
keeps  on  deposit,  but  it  is  also  tested  by  the 
promptness  with  which  he  pays  his  loans  and  the 
extent  in  general  to  which  he  aids  the  bank  in  de- 
veloping its  own  strength  and  banking  power. 

In  a  rough  way,  then,  the  bank  can  extend  credit 
to  customers  about  in  proportion  to  what  they  do 
to  support  and  maintain  this  credit  structure.  The 


THE  ELEMENTS  OP  BANKING  63 

homely  and  practical  expression  of  this  is  to  say 
that  the  banks  can  best  help  those  who  help  the 
banks.  There  is  one  further  qualification.  The 
bank  can  safely  and  properly  loan  the  most  to  cus- 
tomers who  borrow  for  the  shortest  time.  The  use- 
fulness of  bank  credit  is  greatly  increased  when 
it  is  borrowed  by  a  customer  who  uses  it  to  serve 
a  temporary  need  and  promptly  repays  it  to  the 
bank,  to  be  used  in  turn  by  another  customer,  so 
that  a  given  sum  is  used  by  several  different  cus- 
tomers in  succession  in  the  course  of  a  year.  De- 
posits created  out  of  loans  of  this  character  are 
responsive,  elastic,  and  serve  the  whole  commu- 
nity. A  permanent  standing  loan  of  bank  credit  to 
one  customer  is  something  like  cash  hidden  in  a 
safe  deposit  box.  It  is  withdrawn  from  useful 
circulation ;  it  impairs  the  usefulness  of  the  bank 
and  prevents  it  from  serving  its  other  customers. 
A  bank  cannot  create  a  line  of  satisfactory,  elas- 
tic, circulating  credit  out  of  a  sodden  mass  of  long 
time,  or  sleeping  loans.  The  bank,  then,  in  order 
to  be  of  the  highest  usefulness  in  the  community, 
must  extend  credit  to  the  customer  who  is  known 
to  be  of  high  character,  who  is  amply  able  to  pay 
when  due,  who  does  not  try  to  ]5orrow  more  than 
his  fair  proportion  or  for  too  long  a  time,  and 
who  does  his  full  part  in  cooperation  with  the 


64  THE  A  B  O'S  OP  BUSINESS 

bank  and  strengthening  it  as  a  vital  agency  in 
the  business  life  of  the  community. 

It  is  thus  seen  that  the  most  important  service 
the  bank  renders  the  public  is  practically  to  mul- 
tiply the  money  supply,  and  this  service  benefits 
the  non-borrowing  customer,  for  even  the  non- 
borrower's  bank  balance  is  nothing  but  bank 
credit,  which  has  been  transferred  to  him  by  the 
writing  of  a  check.  Probably  the  next  most  im- 
portant service  lies  in  receiving,  as  deposits  from 
its  customers  for  immediate  credit,  checks  drawn 
on  other  banks,  often  in  distant  cities.  The  value 
of  this  collection  service  is  little  understood.  It 
can  be  best  realized  by  thinking  out  some  other 
good  method  of  converting  these  checks  into  im- 
mediate cash  without  using  a  bank  for  the  pur- 
pose. 

But  the  important  economic  function  of  a  com- 
mercial bank  is  really  that  of  a  carrier.  A  bank 
extends  credit  to  perhaps  a  cotton  planter  (speaks 
of  it  as  loaning  him  money)  by  receiving  the 
planter's  note  and  entering  the  proceeds  to  his 
credit.  If  the  planter  uses  part  of  it  to  pay  for 
seed,  he  sends  his  check  to  the  seed  dealer,  who 
is  thereby  enabled  to  pay  off  a  loan  at  his  own 
bank  which  he  had  previously  made  for  the  pur- 
pose of  buying  and  carrying  seed.    If  the  planter 


THE  ELEMENTS  OF  BANKING  66 

uses  part  of  it  to  pay  cotton  pickers,  he  draws  that 
out  in  bank  notes,  and  that  part  of  the  amount  be- 
comes transformed  from  deposit  credit  into  note 
credit,  going  out  of  existence  as  one  and  coming 
into  existence  as  the  other.  The  two  are  exactly 
the  same  thing  in  different  forms.  The  bank 
notes  are  paid  as  wages  to  cotton  pickers,  who 
probably  spend  them  at  the  store  for  groceries. 
They  are  then  promptly  deposited  at  the  bank  by 
the  grocer  to  the  credit  of  his  account.  They  thus 
pass  back  into  the  bank  and  so  out  of  circulation 
as  note  credit.  Having  been  deposited  by  the 
grocer,  they  once  more  become  deposit  credit  in 
the  grocer's  account. 

The  planter  finally  sells  his  cotton  to  some  cot- 
ton buyer  in  another  city  and  receives  in  payment 
a  transfer  of  credit  to  him,  perhaps  by  receiving 
a  check,  or  perhaps  by  sending  through  for  col- 
lection his  own  draft  on  the  buyer  with  a  cotton 
bill  of  lading  attached  to  it.  The  planter,  upon 
depositing  the  proceeds  of  this  sale  to  his  credit 
in  his  bank,  draws  against  his  balance  a  check  in 
favor  of  his  bank  and  pays  his  note.  His  note  is 
returned  to  him  and  the  credit,  or  deposit,  which 
was  originally  created  for  him  is  thus  liquidated, 
having  served  its  purpose.  In  the  meantime,  the 
cotton  buyer's  bank  has  created  a  credit  for  him 


66  THE   A  B  O'S  OF  BUSINESS 

(loaned  him  money)  with  which  to  buy  and  carry 
the  cotton  until  he  sells  it  to  a  manufacturer  of 
cotton  cloth.  This  credit  will  also  be  liquidated 
in  turn  when  the  manufacturer  pays  him  for  the 
cotton.  But  the  manufacturer  will  pay  him  by  ob- 
taining credit  from  some  bank  that  he  regularly 
deals  with  and  the  manufacturer's  bank  will  now 
carry  the  cotton  while  it  is  being  made  into  cloth, 
and  until  it  is  sold  to  a  wholesale  drygoods  house. 
As  the  manufactured  cotton  fabric  passes  to  a 
wholesaler  and  then,  later,  to  a  retailer,  the  bank 
that  serves  each  one  of  these  will  create  for  him 
credit  with  which  to  pay  for  it,  and  each  credit 
will  be  wiped  out  again  by  a  subsequent  sale.  The 
carriage  of  this  cotton  on  bank  credit  will  end 
when  the  retailer  sells  it  to  the  final  consumers, 
each  of  whom  buys  only  a  small  amount  and  pays 
for  it  out  of  his  earnings,  which  he  did  not  have 
to  borrow.  In  this  manner  the  bank  credit,  origi- 
nally created  for  the  planter,  has  carried  the  cot- 
ton clear  through  to  the  consumer  who  finally 
pays  it.  All  the  credit  needed  was  brought  into 
existence  at  the  required  time  and  place  and 
passed  out  of  existence  after  it  had  served  its 
purpose.  The  credit  created  by  a  commercial  bank 
was  necessary  at  every  step.  Existing  entirely 
upon  a  foundation  of  faith  and  character  and  con- 


THE  ELEMENTS  OF  BANKING  67 

fidence,  it  cmmbles  if  these  are  shaken,  and  busi- 
ness suffers  in  consequence.  In  earlier  years, 
under  a  more  primitive  banking  system,  our  peri- 
odical breakdowns  usually  began  with  convul- 
sions in  the  credit  system. 


CHAPTER  V 

BUSINESS   CONSEQUENCES   OF   THE   WAB 

The  war  did  three  things  to  American  business. 
The  first  of  these  is  that  it  absorbed  and  wasted 
some  tens  of  billions  of  our  current  and  accumu- 
lated wealth  in  the  form  of  labor  and  commodi- 
ties and  we  are  now  poorer  to  that  extent. 

The  broad  economic  fact  is  that  the  generation 
which  conducts  the  war  pays  for  it.  Much  has 
been  said  about  placing  the  burden  upon  future 
generations;  about  financing  the  war  entirely  by 
issuing  government  bonds  and  allowing  posterity 
to  pay  them.  Posterity  can  only  pay  them  to 
itself ;  there  will  be  no  one  else  present  to  receive 
the  payment.  Posterity  will  be  both  the  debtor 
and  the  creditor.  The  Government  is,  of  course, 
mere  machinery.  To  be  sure,  the  Government 
will  levy  taxes  upon  later  generations  to  pay  off 
the  bonds,  but  these  later  generations  will  also 
own  the  bonds  and  qo  will  receive  their  tax  money 
back  again  in  the  form  of  bond  payments.  Not 
the  same  individuals,  to  be  sure,  but  the  same 
generation.   Each  individuaPs  case  is,  of  course,  a 

68 


BUSINESS   CONSEQUENCES   OF  THE   WAB  69 

thing  by  itself;  some  men  will  pay  taxes  and 
others  will  own  bonds,  but  of  the  people  as  a 
whole,  these  things  are  true. 

The  real  cost  of  the  war  consists  in  simply  the 
labor  and  material  that  were  consumed  and  de- 
stroyed in  conducting  it.  When  the  war  is  ended, 
these  things  are  gone;  the  nation  is  that  much 
poorer,  and  the  war  has  thus  been  paid  for.  If 
we  should  thereupon  at  once  destroy  all  of  the  war 
bonds  that  the  United  States  Government  has  is- 
sued, the  wealth  of  the  nation  would  be  no  less. 
Certain  individuals '  fortunes,  to  be  sure,  would  be 
lost,  and  again  other  individuals  would  escape  a 
long  subsequent  burden  of  taxation,  but  the  people 
of  the  United  States,  as  a  whole,  would  have  lost 
nothing.  A  government  debt  is  not  a  national 
asset.  By  issuing  bonds,  then,  some  of  the  people 
simply  borrow  from  others,  but  considered  as  a 
whole,  they  simply  owe  money  to  themselves. 
The  Government  only  keeps  the  books.  Through 
future  generations  the  Government  will  each  year 
collect  from  the  people  a  large  sum  in  the  form  of 
taxes,  for  the  purpose  of  paying  it  back  again  to 
the  people  as  bondholders.  This  will  affect  indi- 
viduals in  proportion  to  their  respective  liability 
to  taxation,  and  in  proportion  to  the  bonds  they 
bought  and  kept.    He,  however,  who  saved  dur- 


70 

ing  the  war  and  bought  bonds  with  his  savings,  in- 
sured for  his  children  that  they  should  receive 
taxes  instead  of  paying  them. 

Excepting  the  repairs  to  our  plant,  subse- 
quently necessary,  it  is  substantially  true  that  we 
paid  for  the  war,  in  labor  and  materials,  as  it 
progressed.  The  steel  that  peaceful  industry 
would  have  fashioned  into  farm  machinery  or 
locomotives  now  encumbers  battle  fields.  Copper 
that  could  have  become  wires  for  the  transmis- 
sion of  electric  power  was  virtually  destroyed  as 
shell  casings.  The  labor  that  in  peace  would  have 
turned  these  metals  into  things  of  value  was  in- 
stead employed  in  producing  only  ruins  and 
wreckage. 

Beside  this  actual  destruction  of  current  com- 
modities and  waste  of  labor  we  wasted  our  fixed 
capital  by  allowing  deterioration  of  our  plant.  It 
was  overdriven  during  the  war  and,  through  scar- 
city of  labor  and  materials  to  repair  it,  it  was  al- 
lowed to  run  down  in  physical  condition.  For 
illustration,  it  is  said  that  some  such  sum  as  a 
billion  dollars  must  be  spent  upon  our  railways 
within  a  year  to  restore  them  to  their  former  con- 
dition. To  the  average  man  this  piece  of  news 
means  little.  He  may  be  vaguely  interested  in 
their  ability  to  get  so  much  money.    He  may  per- 


BUSINESS  CONSEQUENCES  OP  THE  WAB  71 

haps  resent  their  asking  for  it.  To  another  man 
perhaps  it  signifies  more  and  he  is  gratified  be- 
cause he  sees  that  it  will  make  active  business  in 
railway  materials  and  equipment.  But  many  of 
us  forget  that  it  is  not  enough  that  business  shall 
be  merely  active ;  it  ought  also  to  be  of  the  produc- 
tive kind.  This  business  of  repairing  a  broken- 
down  road  is,  to  be  sure,  better  than  some  kinds 
of  business  which  are  even  less  productive,  such 
as  manufacturing  chewing  gum  or  burying  the 
dead,  but  it  is  not  productive  in  the  way  it  would 
be  if  the  same  labor  and  materials  were  put  into 
the  building  of  an  entirely  new  line  of  railroad  in 
some  deserving  locality.  In  the  latter  case,  for  a 
billion  dollars  spent  in  labor  and  material,  we 
would  be  richer  by  the  value  of  a  new  railroad.  In 
the  existing  case,  we  only  get  for  our  billion  dol- 
lars just  the  same  railroads  we  had  before  the 
war.  In  other  words,  about  half  a  million  men 
who  might  otherwise  devote  the  year  to  produc- 
ing new  wealth,  must  instead  work  at  repairing 
the  damage  that  the  war  did  to  our  railway  sys- 
tem. The  same  is  true  of  our  factories,  our  pub- 
lic utility  systems,  and  our  American  business 
plant  in  general.  For  years  we  must  take  men 
away  from  productive  labor  to  repair  damage. 
We  are  poorer  by  the  total  of  all  this. 


72  THE  A  B  C'S  OF  BUSINESS 

The  second  thing  the  war  did  to  the  highly  com- 
plex machinery  of  American  business  was  to 
throw  it  badly  out  of  adjustment.  It  had  been 
running  smoothly  and  delivering  an  immense  an- 
nual output  of  goods,  because  each  part  was  do- 
ing just  about  all  the  other  parts  required  of  it. 
Coal  was  coming  from  the  mines,  ore  from  the 
ground,  lumber  from  the  forests,  cotton  from  the 
fields,  all  in  just  about  the  right  amount,  and  each 
of  us  found  himself  supplied  at  all  times  with  the 
tools  and  materials  for  his  particular  work.  The 
outbreak  of  war  suddenly  made  all  this  system- 
atic organization  behave  like  an  orderly  nest  of 
ants  that  someone  had  poked  with  a  stick.  Mil- 
lions of  men  were  taken  away  entirely  or  sud- 
denly shifted  to  other  work.  Machinery  was  de- 
voted to  new  purposes  and  sources  of  supply  were 
interrupted  everywhere.  Naturally,  there  was  a 
great  loss  of  efficiency,  which  was  partially,  but 
not  wholly,  overcome  by  the  extra  zeal  and  energy 
which  the  war  put  into  us. 

For  three  years  since  the  Armistice  we  have 
been  putting  the  machinery  back  into  adjustment 
again,  but  it  is  still  not  geared  up  to  capacity  pro- 
duction. It  is  not  turning  out  new  wealth  in  the 
form  of  goods  in  anything  like  the  quantity  it  will 


BUSINESS   CONSEQUENCES  OF  THE   WAR  73 

produce  when  fully  readjusted.  This  is  the  sec- 
ond form  of  war  injury. 

The  third  serious  thing  the  war  did  to  us  has 
to  do  with  money  (meaning  bank  credit).  It  be- 
came so  plentiful  and  cheap  that  we  became  drunk 
upon  it  and  are  still  suffering  the  consequences. 

When  we  began  to  mobilize  and  equip  an  army 
the  Government  needed  a  fabulous  amount  and 
variety  of  things.  These  were  the  very  same 
things  we  had  been  using  in  ordinary  civil  life, 
though  perhaps  made  up  in  somewhat  different 
form.  The  Government  had  not  enough  money 
wherewith  to  buy  all  these  things  and  no  time  to 
raise  it  by  taxation.  So  it  had  to  issue  bonds.  It 
could  not  directly  trade  us  bonds  for  things,  so  it 
had  to  sell  us  bonds  for  money  and  then  give  us 
back  the  money  again  for  the  things.  A  man  who 
bought  ten  thousand  dollars*  worth  of  bonds  gen- 
erally borrowed  the  money  at  his  bank  on  the 
bonds  as  security.  In  substance,  he  and  the  bank 
simply  created  ten  thousand  dollars  in  bank  de- 
posits by  signing  a  note  and  having  the  same 
figures  that  were  written  on  the  note  also  written 
on  the  credit  side  of  his  deposit  account  at  the 
bank.  It  was  new  money  that  did  not  exist  be- 
fore he  signed  the  note.    He  at  once  transferred 


74  THE  A  B  O'S   OP  BUSINESS 

his  ten-thousand-dollar  balance  to  the  credit  of 
the  Government  in  payment  for  the  bonds.  We 
all  did  this  for  about  two  years  and  in  that  way 
created  perhaps  fifteen  or  twenty  billion  dollars 
of  new  bank  deposits,  and  they  mostly  still  exist 
as  such.  This  amount  of  money  (as  we  use  the 
word)  was  created  by  the  public,  transferred  to 
the  Government  in  exchange  for  bonds,  and  then 
transferred  back  to  the  public  again  in  payment 
for  things. 

It  was  not  the  best  way  to  finance  the  war,  and 
a  few  eminent  economists  told  us  so  at  the  outset, 
but  no  one  paid  any  attention  to  them,  because 
the  hard-headed  business  men  said  they  were 
wrong  and  that  we  must  have  business  as  usual. 
They  said  if  the  people  were  expected  to  finance 
the  war  they  must  be  permitted  to  make  money, 
and  in  order  to  make  money  business  must  be  kept 
good  and  therefore  it  was  the  unrestricted  pur- 
chase of  goods  that  should  be  encouraged;  not 
the  practice  of  economy.  And  so,  for  a  long  pe- 
riod it  was  our  policy  and  belief  that,  at  a  time 
when  the  army  needed  everything,  the  civilian 
population  could  do  the  most  good  by  buying  and 
consuming  everything  they  could  in  order  that 
trade  might  be  kept  active.  This  should  have  de- 
ceived no  one,  but  it  did.    It  had  deceived  Eng- 


BUSINESS   CONSEQUENCES   OF   THE   WAR  75 

land  for  a  long  time  earlier  in  the  war,  to  her  al- 
most irreparable  injury.  So  we  all  agreed  that 
the  correct  way  to  finance  the  war  was  to  borrow 
money  and  let  the  next  few  generations  help  pay 
for  it. 

Consequently,  when  we  had  all  borrowed  the 
money  and  transferred  it  to  the  Government  for 
bonds,  we  considered  our  duty  done.  The  Gov- 
ernment could  take  the  money  and  buy  what  it 
pleased.  The  trouble  was  it  had  to  buy  the  very 
things  we  also  wanted.  It  had  no  time  to  waste 
in  trying  to  conduct  a  cheap  war.  It  had  to  act 
quickly  without  much  regard  for  what  it  cost.  It 
needed  perhaps  a  quarter  or  a  third  of  every- 
thing the  country  could  produce,  and  needed  it 
at  once  regardless  of  price.  The  army  required 
food,  clothes,  shoes,  metals,  chemicals,  vehicles, 
everything  that  we  as  individuals  also  needed. 
There  was  not  enough  produced  to  supply  both 
the  war  requirements  and  the  usual  needs  of  the 
civilian  population.  We  did  not  realize  this.  Ac- 
cordingly, in  the  open  market  the  Government 
and  ourselves,  in  innocent  ignorance  of  what  we 
were  doing,  bid  against  one  another  for  what  there 
was  and  so  we  forced  the  prices  steadily  up. 

It  is  plain  that  if  the  army  required,  say  one- 
third  of  all  the  goods  the  country  could  produce, 


76 

then  the  civilian  population  must,  through  self- 
denial  and  economy,  get  along  on  the  other  two- 
thirds.  If  it  had  done  so,  we  could  have  fought 
the  war  and  been  little  or  no  poorer.  As  it  was, 
in  the  struggle  for  goods  between  the  Government 
and  the  civil  population,  we  used  up  everything 
we  could  produce,  everything  we  had  in  reserve, 
and  really  consumed  a  noticeable  part  of  our  plant 
itself.  This  was  all  done  through  the  means  of 
creating  new  money  in  vast  amounts  and  spend- 
ing it  freely.  The  banks  created  this  money  by 
taking  the  notes  of  their  customers  secured  by 
Government  Bonds,  but  they  soon  had  to  begin 
carrying  the  notes  to  the  Federal  Reserve  Banks 
for  rediscount,  so  the  burden  of  all  this  new  bank 
credit  was,  of  course,  properly  and  necessarily 
made  to  rest  on  the  gold  reserves  of  the  Federal 
Reserve  Banks.  When  the  war  began,  these  gold 
reserves  amounted  to  about  eighty  per  cent  of  the 
liabilities  of  the  reserve  banks.  But  as  we  pro- 
ceeded in  financing  the  war  by  creating  new 
money,  the  Federal  Reserve  Banks'  liabilities 
were  thus  increased  until  the  gold  reserve 
amounted  to  only  about  forty  per  cent  of  the  lia- 
bilities. This  was  ample,  perhaps,  if  nothing  more 
ever  happened,  but  if  we  had  more  war  or  if  we 
had  to  export  a  great  amount  of  gold  in  payment 


BUSINESS   CONSEQUENCES   OF   THE   WAE  77 

of  adverse  foreign  trade  balances,  then  there 
would  be  none  too  much.  There  was  nothing 
alarming  about  a  forty  per  cent  reserve.  The 
alarming  thing  was  our  steady  and  rapid  mo^|e- 
ment  towards  a  further  reduction  of  it.  Fori  a 
movement  in  price  inflation  feeds  upon  itself. 
Each  rise  of  prices  necessitates  creating  more 
money  and  the  money  so  created  forces  the  prices 
higher.  It  would  no  more  stop  itself  than  would 
a  sled  going  down  hill,  except  in  the  same  way. 
That  is,  not  until  the  reserve  ratio  declined  to  a 
much  lower  percentage,  and  then  we  should  all  at 
once  take  fright,  pass  through  a  panic,  and  slowly 
recover  our  senses  amid  the  ruins  of  our  once 
splendid  business  organization. 

Fortunately  the  governors  of  the  Federal  Re- 
serve System  realized  that  the  further  inflation  of 
bank  credit  must  be  stopped.  But  the  task  was  a 
delicate  one.  Banks  were  told  they  must  not  go 
further  in  creating  deposits  for  customers  by  mak- 
ing loans  to  them,  unless  there  existed  a  higher 
reason  for  it  than  the  mere  private  advantage  of 
the  customer.  On  the  other  hand,  it  was  impor- 
tant that  the  machinery  for  producing  the  essen- 
tials of  life  should  not  be  slowed  down  for  lack 
of  credit.  It  was  a  difficult  course  to  pursue. 
Further  expansion  must  practically  cease  and  yet 


78  THE  A  B   O'S  OP  BUSINESS 

a  sharp  contraction  would  produce  disaster.  The 
attempt  was  made  in  the  spring  of  1920.  The 
banks  and  the  public  fairly  understood  it  and 
cooperated  in  it.  In  consequence,  probably  as  near 
the  desired  result  was  accomplished  as  could  have 
been  hoped  for. 

The  expansion  of  bank  credit  ceased.  The  rise 
of  price  inflation  ceased  simultaneously.  Those 
who  had  been  buying  for  a  further  speculative 
profit  became  timid.  Orders  were  canceled.  Many 
carrying  large  lines  hastened  to  unload  at 
slightly  lowered  prices  and  we  were  fairly 
launched  upon  a  falling  market.  In  the  mean- 
time, a  similar  but  more  extreme  career  of  infla- 
tion in  Japan  had  collapsed,  accompanied  by 
panic  and  widespread  business  disaster.  The  fall 
of  prices,  once  unmistakably  begun,  was  hast- 
ened and  intensified  by  all  but  universal  unwill- 
ingness to  buy,  based  upon  the  belief  that  they 
would  go  still  lower. 

The  collapse  of  prices  which  followed  through- 
out 1920  and  1921,  while  ruinous  to  some,  in- 
jurious to  many,  and  demoralizing  to  everyone, 
was  inevitable  and  far  less  ruinous  than  it  would 
have  been  if  further  delayed.  As  an  economic  dis- 
turbance it  would  be  classified  as  a  business  crisis 
without  panic.    Like  every  crisis,  it  is  followed 


BUSINESS  CONSEQUENCES  OF  THE  WAB  79 

by  business  depression,  the  cure  for  which  is  hard 
work,  rigid  economy,  and  the  lapse  of  sufficient 
time  for  our  vast  complicated  industrial  machin- 
ery to  work  itself  slowly  back  into  the  nice  and 
accurate  adjustment  necessary  to  the  large  pro- 
duction of  wealth.  This  cannot  be  complete  until 
a  more  just  and  more  stable  relation  is  ap- 
proached between  the  price  of  each  commodity 
and  all  the  others.  Prices  have  not  declined  uni- 
formly. Some  have  fallen  too  far  and  others  not 
far  enough.  When  time  and  economic  law  have 
brought  these  into  proper  adjustment,  men  can 
produce  and  trade  in  normal  volume  and  not  until 
then. 

We  have  fought  our  war  and  as  a  nation  we 
have  paid  for  it.  But  we  are  a  great  deal  poorer 
in  consequence  and  we  do  not  know  it.  We  do  not 
realize  it  because  we  have  plenty  of  money  and  it 
is  our  custom  to  think  of  money  as  an  end,  where- 
as it  is  only  one  of  the  tools.  The  only  thing  from 
which  American  business  is  now  suffering  will  be 
cured  by  hard  work  and  rigid  economy,  and  by 
nothing  else.  There  is  nothing  serious  perma- 
nently the  matter  with  us.  We  have  wasted  a  great 
deal  of  wealth ;  our  railways  are  in  bad  order ;  our 
banks  have  not  yet  digested  everything  they  had 
to  eat  during  the  war;  our  people  have  not  gone 


80  THE  A  B  O'S  OP  BUSINESS 

back  to  regular  work  yet  and  are  under  a  kind  of 
delusion  that  instead  of  becoming  poor  they  have 
become  rich,  just  because  they  do  not  understand 
what  money  is. 

Notwithstanding  these  facts,  it  is  difficult  to  be- 
lieve that  the  industrial  forces  of  a  great  nation 
which  have  for  years  been  working  so  largely  on 
war  materials  can  be  quickly  and  smoothly  trans- 
formed and  devoted  to  the  production  of  perma- 
nent wealth  and  the  comforts  and  necessaries  of 
life.  There  is  no  doubt  that  it  will  be  done  in  due 
course  and  that  the  world  will  enter  upon  its 
greatest  era  of  progress  and  prosperity,  in  con- 
sequence of  the  lessons  it  has  learned  and  the 
redoubled  exertions  it  will  make.  But  the  inter- 
vening period  of  transformation  from  activities 
of  war  to  those  of  peace  will  call  for  high  intel- 
ligence and  sustained  confidence  in  employers  and 
investors ;  for  patience,  moderation,  self-restraint, 
and  sound  judgment  among  employees;  for  ed- 
ucation among  the  leaders  of  their  organizations, 
and  for  wise  political  leadership  on  the  part  of 
Government.  This  co6peral;ion  and  control  by 
our  Government  must  not  be  of  the  exaggerated, 
paternal  kind  that  renders  private  enterprise  im- 
potent and  unnecessary.  It  must  be  strong 
enough  to  assist  and  protect  us  adequately  against 


BUSINESS   CONSEQTJENCES   OF  THE   WAR  81 

unequal  foreign  competition  backed  by  powerful 
foreign  governments;  intelligent  enough  to  con- 
trol and  repress  sternly  illegitimate  or  dangerous 
tendencies,  and  yet  give  full  encouragement  to  the 
development  of  personal  resourcefulness,  initia- 
tive and  responsibility.  It  must  be  a  controlling 
partner,  not  a  parent. 

We  are  being  called  upon  to  deal  with  vague 
suggestions  for  the  radical  reorganization  of 
society,  for  indiscriminate  government  control, 
and  for  the  rearrangment  of  industry  by  the  in- 
troduction of  new  and  experimental  adjustments 
between  capital  and  labor.  With  relation  thereto, 
it  may  be  said  that  the  period  we  are  now  entering 
will  contain  problems  and  perplexities  enough 
without  adding  these.  They  are  questions  fit  to 
be  dealt  with  by  statesmen,  after  they  shall  have 
been  allowed  time  to  gather  the  lessons  of  the  war 
and  the  final  deliberate  judgment  of  the  world's 
best  intelligence.  The  example  of  Russia  would 
seem  to  carry  adequate  warning  against  hasty 
and  radical  attempts  to  alter  the  existing  social 
and  industrial  structure  during  a  situation  so  del- 
icate. 

We  come,  then,  to  the  consideration  of  what  we 
should  do  toward  the  restoration  of  ourselves  and 
our  country  to  a  state  of  peaceful  progress  and 


82  THE  A  B  O'S   OF  BUSINESS 

prosperity.  We  cannot  be  enriched  by  law,  by 
quarreling  among  ourselves,  or  by  the  sudden  ap- 
plication of  powerful  remedies  newly  discovered 
and  loudly  recommended  by  political  quacks.  We 
have  got  to  win  the  prosperity  of  peace  in  just 
exactly  the  way  we  have  won  the  victory  of  war : 
by  individual  hard  work,  plain  living,  the  elimina- 
tion of  waste,  and  the  fearless  resumption  of  the 
enterprises  of  peace,  with  a  firm  confidence  in  a 
future  from  which  every  really  serious  menace  has 
been  removed.  For  this  we  have  the  talents,  the 
resources,  and  the  machinery  which  we  applied  to 
war,  and  the  lessons  we  have  learned  besides.  We 
have  only  to  devote  them  to  the  production  of 
wealth. 

The  real  problem  for  America  calls  for  solution 
by  each  individual.  It  is  perhaps  first  of  all  a 
problem  of  eliminating  waste — not  merely  the 
waste  that  throws  away  something  valuable,  but 
the  waste  of  time  uneconomically  employed  and 
misapplied  labor  and  material;  the  unnecessary 
doing  of  something  already  being  done  adequately. 
These  and  other  methods  of  a  like  nature  are  the 
new  sources  of  national  wealth  to  be  gained 
through  economy  as  well  as  through  increased 
production.  They  point  the  way  to  private  for- 
tunes to  be  gained,  or  saved,  by  those  who  choose 


BUSINESS   CONSEQUENCES   OF  THE   WAR  83 

to  seize  the  opportunity.  A  private  fortune, 
however  large,  accumulated  in  this  way  or  by  any 
other  form  of  enlarged  production  or  diminished 
waste  is  a  public  benefit.  It  is  newly  created 
wealth  devoted  to  the  public  welfare.  The  pleas- 
ure of  possessing  and  managing  it,  together 
with  the  moderate  reward  of  living  in  somewhat 
greater  comfort  or  luxury,  has  served  as  the  mo- 
tive to  bring  forward  the  best  intelligence  and 
talent  of  him  who  thereby  created  it.  But  he 
cannot  consume  the  fortune  or  even  a  great  in- 
come. His  private  consumption  can  at  most  be 
but  a  trifle  of  the  wealth  he  has  brought  into 
existence  or  saved  from  waste  and  destruction. 
All  the  rest  of  it  must  go  back  into  productive 
employment  in  industry.  There  is  no  other  place 
it  can  go.  It  will  in  turn  thus  create  new  industry, 
create  greater  demand  for  labor,  produce  more  of 
the  comforts  and  necessaries  of  life,  and  cheapen 
them.  The  proprietor  of  the  invested  capital  can 
eat  or  wear  but  little  more  than  the  rest  of  us. 
Fr^m  the  public  point  of  veiw  it  does  not  matter 
much  who  owns  the  invested  wealth  of  the  country, 
so  long  as  under  adequate  public  control  it  is  not 
injuriously  used  or  dishonestly  obtained.  The 
important  requirement  is  that  there  should  be 
plenty  of  it.    To  insure  the  creation  of  plenty  of 


84  THE   A  B   O'S   OF  BUSINESS 

it,  it  should  belong  (with  such  moderate  benefits  as 
accompany  it)  to  him  who  can  create  or  save  it, 
else  there  will  be  no  motive  to  create  and  none 
created.  And  capital  will  be  sorely  needed  to 
restore  the  enormous  waste  and  destruction  that 
have  taken  place  and  to  provide  the  financial  re- 
sources for  which  the  world  must  now  look  largely 
to  America. 


CHAPTER  VI 

THE   ABUSE   OF   OUB  RAILWAYS 

Nothing  could  better  serve  to  demonstrate  the 
blindness  of  American  business  than  its  treatment 
of  its  own  railway  system.  This  system,  perhaps 
two  hundred  thousand  miles  of  line,  with  cars 
and  locomotives,  buildings,  city  terminals,  and 
other  appurtenances  for  its  convenient  use,  cost 
and  is  valued  at  about  twenty  billion  dollars.  Its 
worth  to  us  is  many  times  that  sum,  in  the  sense 
that  if  we  were  suddenly  deprived  of  it  nothing 
else  would  have  any  value  worth  mentioning.  If 
it  should  cease  operating,  the  two  or  three  million 
people  who  are  living  on  a  barren  rock  known  as 
New  York  City  would  either  perish  or  flee  for 
their  lives  (on  foot,  for  they  could  even  get  no 
gasoline)  to  the  farms  of  our  western  states  where 
their  food  is  produced.  Every  other  large  city 
would  also  become  a  mass  of  empty  buildings. 
Every  industry  would  cease  for  lack  of  something 
which  is  now  being  hauled  to  it  regularly  by  rail- 
way.   The  farms  would  perish  next  for  lack  of 

85 


86  THB  A  B  O'S  OF  BUSINESS 

clothing,  tools,  machinery,  and  supplies  of  city 
origin,  now  coming  regularly  by  railway.  There 
could  be  a  glut  of  food  in  one  state  and  a  famine 
in  the  next  one. 

The  business  of  building  and  managing  these 
railways  was  undertaken  and  is  carried  on  by 
about  two  million  men.  A  good  many  years  ago, 
when  the  railroad  business  was  young  and  inex- 
perienced, those  men  made  the  customary  mis- 
takes of  ignorance,  as  all  the  rest  of  us  regularly 
do.  They  abused  the  great  power  that  had  fallen 
into  their  hands.  They  tyrannized  over  the  rest 
of  us  when  we  traveled  or  shipped  goods.  They 
unjustly  discriminated  by  overcharging  some  of 
us  and  favoring  others,  and  they  seemed  at  one 
time  to  be  making  too  much  money,  which  dis- 
pleased us  because  it  was  they  who  were  getting 
it  instead  of  ourselves.  As  to  this  latter  objec- 
tion, we  did  not  seem  to  realize  that  the  only  rea- 
son they  put  their  time  and  material  into  the  build- 
ing of  roads  was  because  there  was  money  in  doing 
it  and  that  if  we  forbade  the  profits  no  one  would 
build  more  roads.  Even  the  Government  learned 
during  the  late  war  that  the  way  to  get  a  needed 
thing  done  quickly  was  to  allow  a  profit  in  it. 
No  one  will  work  long  at  an  unprofitable  occupa- 
tion.    It  is  against  public  policy  that  anyone 


THE  ABUSE   OF   OUE  RAILWAYS  87 

should.  These  observations  are  just  matters  of 
industrial  evolution  and  economic  law. 

But  for  these  various  reasons  we,  as  a  nation,  be- 
gan to  hate  our  railroads  and  proceeded  to  punish 
them,  not  merely  by  just  and  wholesome  regula- 
tion, but  also  intemperately,  in  pure  anger,  like 
a  child  kicking  its  toys.  There  was  nothing  we 
needed  so  much  as  more  railroads  and  better  ones, 
but  we  so  terrified  the  builders  that  progress  in 
building  was  greatly  impeded;  in  fact,  it  prac- 
tically ceased.  We  also  starved  the  roads  we 
had,  by  excessive  regulation  at  the  hands  of  nu- 
merous commissioners  of  limited  vision.  We 
acted  toward  our  railroads  as  though  they  were 
public  enemies,  merely  intruding  to  exasperate 
and  rob  us,  instead  of  realizing  that  they  were  our 
own  children. 

In  spite  of  all  this  mistreatment,  they  grew  up 
and  to-day  are  fairly  near  a  complete  system  in 
size,  but  horribly  emaciated.  We  need  better 
transportation  service  from  them  more  than  we 
need  anything  from  anybody,  and  yet,  until  we  re- 
cently enacted  the  new  railroad  law,  we  had  al- 
most ruined  them.  We  nearly  lost  the  war  be- 
cause they  broke  down.  They  needed  money  to 
buy  equipment  and  rails.  We  refused  to  loan  it 
to  them  by  buying  bonds  and  stocks  from  them, 


88  THE  A  B   C'S   OF  BUSINESS 

because  their  credit  was  not  good.  We  kept  them 
poor  and  their  credit  bad  by  denying  them  enough 
earnings,  and  then  refused  to  loan  them  the 
needed  capital  because  they  were  so  poor,  and 
then  abused  them  because,  being  too  poor  to  bor- 
row the  money  necessary  to  equip  themselves 
properly,  they  were  unable  to  move  things  as  fast 
as  we  needed  them  moved. 

This  is  also  the  approximate  history  of  the 
method  we  have  employed  in  providing  ourselves 
with  other  indispensable  services,  such  as  tele- 
phones and  street  cars.  In  all  these  services  the 
vitally  important  thing  to  American  business  is 
that  the  service  shall  be  dependable,  abundant, 
and  quick.  If  it  can  be  cheap,  too,  so  much  the 
better,  but  any  cheapening  of  it  that  at  all  seri- 
ously impairs  its  speed  and  reliability  will  cost 
American  business,  in  indirect  ways,  many  times 
the  amount  so  saved.  To  impair  our  transporta- 
tion service  is  merely  to  close  the  throttle  upon 
all  industry. 

Probably  we  pay  to  the  railways  in  a  year,  for 
transportation,  a  total  of  five  or  six  billion  dol- 
lars, in  the  form  of  pieces  of  paper,  spoken  of  as 
money.  The  only  use  they  can  make  of  this  paper 
is  to  pass  it  back  to  us  again,  directly  or  indi- 
rectly, in  exchange  for  things  a  railroad  needs.  In 


THE  ABUSE  OF  OtJB  RAILWAYS  89 

short,  then,  out  of  the  forty  or  fifty  billion  dol- 
lars' worth  of  things  which  we  produce  every  year 
(the  railroads  helping  us  to  do  it  by  doing  all  the 
hauling)  we  turn  over  about  one-tenth,  or  say  five 
billion  dollars'  worth,  to  the  people  who  built  and 
who  operate  the  railways,  for  them  to  use  in  mov- 
ing the  trains  and  keeping  up  the  road,  and  to  live 
on  while  doing  so.  It  is  just  possible  that,  now 
we  are  preparing,  under  the  new  rate  schedules, 
to  give  them  more  things  than  heretofore,  they 
will  be  able  after  a  while  to  run  more  and  faster 
and  more  dependable  trains,  handling  more  goods 
in  less  time,  and  in  consequence  of  this  our  entire 
industrial  plant  may  find  itself  turning  over  so 
much  more  smoothly  and  rapidly  that  its  total  an- 
nual output  of  goods  may  increase  by  even  far 
more  than  we  have  now  agreed  to  give  the  rail- 
ways. We  are  thus  very  wisely  repairing  our  na- 
tion's entire  industrial  plant  at  its  weakest  point. 
We  violated  an  economic  law  when  we  refused 
the  railroads  earnings  enough  to  keep  themselves 
in  good  repair  and  good  credit;  rich  enough  to 
build  into,  and  thus  develop,  new  territory  and 
provide  themselves  with  enough  cars  and  engines 
to  transport  speedily  the  freight  and  passengers 
of  American  business.  By  our  past  fifty  years  of 
railroad  policy  we  did  to  ourselves  just  about 


so  THE   A  B   C'S   OF   BUSINESS 

what,  for  illustration,  a  very  vast  factory,  using 
an  interior  tramway,  would  have  done  to  itself 
by  destroying  its  own  tramway  just  to  spite  the 
tramway  boss.  Our  slogan  has  been  billions  for 
chewing  gum  and  joy  rides  and  vanities,  but  not 
one  cent  for  transportation.  We  could  have 
spared  the  money ;  for  so  high  an  authority  as  the 
Secretary  of  the  Treasury  has  recently  estimated 
that  we  are  now  spending  for  luxuries  in  one  year 
a  sum  equal  to  about  the  total  value  of  our  entire 
railway  system. 


CHAPTER  VII 

SPECULATORS  AND  MARKETS 

Few  institutions  in  our  complicated  business 
life  appear  to  be  so  wholly  misunderstood  as  the 
speculator.  His  office  is  to  take  upon  himself  the 
risks  that  the  rest  of  us  do  not  wish  to  assume. 
He  is  not  any  particular  individual.  He  is  almost 
all  of  us  at  one  time  or  another.  He  is  the  man 
who  deliberately  assumes  a  particular  risk  be- 
cause he  wishes  to.  Any  man  who  buys  some- 
thing because  he  thinks  it  is  cheap  at  the  moment, 
or  who  sells  something  because  he  thinks  it  is  too 
high  and  can  be  repurchased  again  later  for  less, 
or  who  keeps  something  he  has  for  sale  because 
he  thinks  he  can  get  more  for  it  later,  is  a  spec- 
ulator at  that  particular  time.  He  may  be  one 
only  on  very  rare  occasions  when  he  thinks  he 
has  exceptionally  correct  judgment,  or  he  may  be 
one  every  day  on  some  line  of  business  of  whose 
hazards  he  makes  a  special  study.  He  is  just  a 
man  who  thinks  his  judgment  is  good  at  that  par- 
ticular moment  on  some  particular  question  and  is 
willing,  if  wrong,  to  stand  a  loss  which  would 

91 


92  THE  A  B  O'S  OP  BUSINESS 

otherwise  have  fallen  on  someone  else  who  did  not 
wish  to  risk  a  loss.  He  does  this  in  the  hope  and 
expectation  of  making  a  profit,  which  would  other- 
wise have  gone  to  someone  else  who  took  no  inter- 
est in  large  and  doubtful  speculative  profits  but 
was  content  with  reasonable  but  certain  commer- 
cial ones. 

A  miller  is  in  the  business  of  grinding  wheat 
into  flour  for  a  legitimate  commercial  profit.  He 
does  not  want  to  concern  himself  with  fluctuations 
in  the  market  price  of  wheat.  In  fact,  they  bother 
him.  He  wants  only  to  make  a  fair  reasonable 
profit  for  grinding,  but  he  wants  to  be  sure  of 
that.  A  sudden  rise  in  the  price  of  wheat  might 
wipe  out  his  year's  earnings  or  a  drop  in  wheat 
at  the  right  moment  might  yield  him  a  large 
profit,  but  he  does  not  wish  to  gamble  in  wheat. 
He  would  like  to  eliminate  all  such  risks  from  his 
business.  He  obtains  credit  from  his  banker, 
with  which  to  buy  wheat,  and  pays  the  banker 
after  he  has  sold  the  flour.  The  miller  simply 
wants  to  make  flour  for  a  reasonable  but  sure 
profit.  He  does  not  wish  to  speculate  in  wheat. 
Moreover,  if  he  did  and  his  banker  knew  it,  he 
would  lose  his  credit.  But  a  wholesale  grocer 
gives  him  an  order  for  flour,  at  an  agreed  price, 
iox  delivery  several  months  later.    Before  the 


SPEOULATOES  AND  MAEKETB  93 

miller  can  name  the  price  he  must  know  in  ad- 
vance what  the  wheat  is  going  to  cost  him  when 
he  comes  to  buy  it  several  months  later — say  in 
December — or  else  take  the  risk  of  its  going  up 
in  the  meantime.  To  know  this  with  certainty  he 
must  have  a  contract  with  someone  to  deliver  him 
the  wheat  in  December  at  an  agreed  price.  So 
he  tells  a  broker  on  the  Produce  Exchange  to  buy 
him  wheat  for  December  delivery.  It  is  called 
buying  futures.  He  seems  to  be  speculating,  but 
is  doing  exactly  the  opposite.  He  has  thus  elim- 
inated from  his  business  all  risks  due  to  fluctua- 
tions in  the  wheat  market.  If  wheat  goes  up  be- 
fore December  it  matters  not  to  him.  He  has 
avoided  a  heavy  loss,  because  he  has  a  contract 
for  his  wheat  at  the  price  on  which  he  calculated 
his  flour  bill.  If  he  had  not  bought  a  future  but 
had  carried  the  risk  himself  and  wheat  had 
dropped  he  would,  of  course,  have  made  a  large 
speculative  profit  on  the  wheat  in  addition  to  his 
regular  business  profit,  but  he  was  content  with 
certainties  and,  beside,  his  banker  might  find  it 
out. 

By  this  future  contract  some  other  man, 
through  the  Produce  Exchange,  bound  himself  to 
deliver  the  wheat  to  the  miller  next  December  at 
an  agreed  price.    Maybe  he  did  not  have  any 


94  THE  A  B  C*S  OF  BUSINESS 

wheat,  but  gave  thorough  investigation  and  keen 
intelligence  to  a  study  of  the  probable  crops  of 
Argentina,  and  Canada,  and  the  rest  of  the  world, 
and  felt  sure  that  when  December  came  the  price 
of  wheat  would  drop  and  be  could  buy  it  for  de- 
livery to  the  miller  at  a  much  lower  price  than 
the  one  named  in  his  contract. 

Other  keen  men  were  making  the  same  investi- 
gations. They  had  time  and  often  very  elaborate 
and  expensive  facilities  for  doing  so.  It  was  to 
some  extent  their  business.  It  was  not  the  miller's, 
however.  He  had  no  interest  in  or  facilities 
for  it.  He  was  a  specialist  in  one  thing  and  they 
in  another.  All  these  keen  men  foresaw  the  same 
thing,  that  wheat  was  probably  going  to  drop  be- 
fore December,  and  probably  all  bid  against  one 
another  (through  different  grain  brokers  on  the 
Exchange)  for  the  miller's  contract.  Thus  they 
bid  the  price  of  grain  down  among  themselves,  so 
the  miller  finally  got  a  fairly  low  competitive 
price.  If  they  had  foreseen  a  short  crop  they 
would  have  bid  the  price  up  instead  of  down. 

Maybe  they  were  just  keen  gamblers  and  never 
had  any  wheat  nor  expected  ever  to  have  any. 
Perhaps  they  just  sold  it  short  and  intended  to 
cover  by  buying  it  in  again  at  a  lower  price.  But 
even  so,  they  made  it  possible  for  the  miller  to 


SPECULATORS  AND  MARKETS  95 

grind  flour  in  large  amounts,  on  credit,  with  se- 
curity to  everyone,  while  they  took  the  risks. 
They  fulfilled  a  purpose  without  which  business 
could  not  be  carried  on  safely  on  reasonable  mar- 
gins of  profit. 

Cotton  planters  must  usually  sell  their  cotton, 
or  most  of  it,  as  soon  as  baled,  because  they  need 
the  money,  and  professional  cotton  buyers  buy  it 
from  them.  These  men  are  specialists,  too. 
They  buy  and  sell  for  a  small  but  sure  commercial 
profit.  They  dare  not  gamble  in  cotton.  They 
know  the  various  grades  and  staples ;  they  are  ac- 
quainted with  the  requirements  of  different  manu- 
facturers and  know  that  each  cotton  spinner  has 
use  for  only  certain  kinds  of  cotton.  They  also 
know  the  cotton  growers  and  the  kind  of  cotton 
they  grow.  They  study  the  world  markets  and 
compete  with  one  another,  both  in  buying  from 
the  planter  and  in  selling  to  the  manufacturer. 

The  cotton  crop  is  the  most  valuable  of  all 
crops.  It  may  be  worth  a  billion  dollars  or  more 
per  year  and  is  nearly  all  bought  upon  credit  cre- 
ated by  banks  for  the  purpose.  The  banks  loan 
the  cotton  buyer  nearly  the  full  value  of  the  cot- 
ton. If  the  cotton  should  drop  much  in  price  the 
buyer  could  not  sell  it  for  enough  to  pay  the  bank. 
He  must  protect  himself  against  the  risks  of  a 


96  THE  A  B  O'S  OP  BUSINESS 

fluctuating  market.  He  handles  vast  amounts  on 
a  very  small  but  sure  profit  earned  by  his  special 
training  and  his  industry.  He  does  not  wish 
speculation  to  enter  his  business.  He  dare  not  be 
carrying  a  lot  of  cotton  that  is  worth  one  price  to- 
day and  another  one  to-morrow.  Therefore,  im- 
mediately upon  buying  actual  spot  cotton,  he 
hedges  it  by  quickly  selling  a  contract  for  the  fu- 
ture delivery  of  the  same  number  of  bales  through 
a  broker  on  the  Cotton  Exchange.  This  is  called 
a  future.  People  who  do  not  know  what  he  is 
doing  think  he  is  gambling  in  cotton  futures.  He 
is  in  reality  taking  steps  to  avoid  doing  so.  If 
the  price  of  cotton  drops  while  he  is  still  carrying 
his  spot  cotton  on  borrowed  money  and  he  has  to 
sell  it  to  a  spinner  at  a  loss,  he  is  not  concerned, 
because  cotton  futures  have,  of  course,  also 
dropped  in  price  and  he  makes  a  corresponding 
profit  by  now  buying  in  his  future  contract  at  a 
lower  price  than  he  received  when  he  sold  it. 
These  two  transactions  offset  one  another,  so  far 
as  fluctuations  in  the  cotton  market  are  concerned, 
and  it  is  these  that  the  dealer  wishes  to  avoid. 
He  has  simply  made  a  small  but  reasonably  sure 
commercial  profit  between  the  planter  and  the 
spinner,  by  virtue  of  his  trained  knowledge  of 
cotton  quality  and  of  the  spinner's  requirements. 


SPEOUIATOES  AND  MABKETS  97 

The  reverse  is  true  if  cotton  prices  rise ;  his  spot 
cotton  shows  a  profit  and  his  hedge  sale  a  loss  of 
a  like  amount.  He  is  in  a  position  where  he  can 
neither  win  nor  lose  by  any  fluctuations  in  the  cot- 
ton market.  If  he  did  not  hedge  his  cotton,  but 
stood  exposed  to  losses  through  fluctuations  in 
the  market,  no  banker  would  extend  him  credit 
and  the  cotton  crop  could  not  move,  because  it  has 
to  move  on  borrowed  money. 

The  man  who  bought  from  him  the  cotton  future 
on  the  Exchange  may  be  a  mere  gambler,  or  he 
may  be  another  kind  of  legitimate  cotton  dealer 
or  spinner,  who  really  bought  it  for  use  in  that 
future  month  and  wanted  his  price  fixed  long  in 
advance,  so  he  could  know  how  to  calculate  the 
price  at  which  he  could  sell  his  cotton  goods,  just 
as  in  the  case  of  the  flour  miller. 

Nothing  can  prevent  fluctuations  in  the  price  of 
commodities,  but  this  highly  ingenious  method 
has  been  found  for  keeping  them  out  of  the  manu- 
facturing business  and  distributive  trade,  so  as  to 
allow  these  businesses  to  be  conducted  with 
safety,  on  narrow  margins  of  reasonably  assured 
profit,  and  in  the  enjoyment  of  good  bank  credit. 
These  market  operations  in  futures  conducted  by 
business  men  for  the  purpose  of  hedging  them- 
selves against  speculative  risks  are  more  or  less 


98  THE  A  B   O'S  OF  BUSINESS 

complicated,  are  carried  on  in  strange  terms  of 
language,  are  transacted  by  comparatively  few 
people,  and  are,  therefore,  but  little  understood 
by  the  American  public.  We  are  mostly  of  the 
belief  that  dealing  in  futures  has  no  higher  or 
more  laudable  purpose  than  shooting  craps  and 
our  statesmen  now  and  then  plan  to  abolish  the 
practice  by  law,  until  someone  takes  the  trouble 
to  explain  to  them  the  truth  about  it,  whereupon 
the  danger  is  averted  until  new  statesmen  are 
elected. 

Then  there  are  those  who  speculate  in  stocks. 
They  make  a  business  of  studying  the  real  value 
of  stocks.  They  stand  ready  to  buy  any  stock 
if  it  is  offered  on  the  market  for  less  than  they 
consider  it  worth,  or  to  sell  it  if  they  consider  the 
price  too  high  and  think  they  can  buy  it  back 
again  later  on  for  less.  In  this  latter  case  the 
speculator  may  not  own  a  share  of  the  stock,  but 
if  he  thinks  it  is  selling  in  the  market  at  too  high 
a  price  he  will  sell  some  of  it  short.  He  simply 
borrows  the  stock  (giving  security  for  its  return) 
from  someone  who  has  it  and  sells  it.  Later  on, 
when  he  thinks  the  price  is  low  enough,  he  buys 
it  in  again  and  returns  it  to  the  man  from  whom 
he  borrowed  it.  His  act,  in  selling  short,  had  a 
tendency  to  lower  the  price  a  little.    His  later  act 


BPECULATOES  AND   MABKETS  99 

in  buying  it  when  he  thought  it  was  low  had  a  ten- 
dency to  raise  it  a  trifle.  The  further  away  from 
normal  the  price  of  a  stock  goes,  either  too  high 
or  too  low,  the  greater  becomes  the  number  of 
men  who  are  aware  of  the  situation  and  try  to 
make  a  profit  by  buying  or  selling  it.  If  stocks 
are  selling  on  the  stock  exchange  just  a  shade  be- 
low their  then  normal  value,  only  a  few  men  are 
interested  in  so  small  a  difference.  Therefore, 
only  a  few  are  buyers  for  a  rise  because  the  rise 
should  be  only  a  small  one,  anyway.  These  few 
^re  the  men  who  are  extra  keen,  watchful,  and 
well  informed.  They  are  largely  professional 
traders.  In  such  circumstances  we  have  what  is 
called  a  narrow  or  professional  market.  But  if 
the  price  falls  very  heavily  many  know  it  and 
many  come  into  the  market  and  give  orders  to 
brokers  to  buy  stocks.  These  speculative  buyers 
do  not  usually  want  the  stocks  to  keep.  It  is  not 
what  is  called  investment  buying.  They  are  just 
speculators  buying  for  a  rise.  They  know  the 
prices  are  too  low.  Their  very  buying  forces 
them  up.  It  is  thus  seen  that  the  further  the 
prices  quoted  on  the  Stock  Exchange  get  away 
from  the  real  value  of  the  stocks,  the  greater  is 
the  number  of  speculators  who  come  into  the  mar- 
ket and  either  buy  or  sell  according  as  they  be- 


lOQ  THE  A  B  C'S  OF  BUSINESS 

lieve  the  stocks  too  low  or  too  high.  The  final  re- 
sult of  their  dealings  is  to  exert  constant  pressure 
in  forcing  the  market  price  of  stocks  towards 
their  true  value.  The  work  of  the  speculator  has 
in  this  way  a  constant  tendency  to  steady  values 
and  prevent  violent  fluctuations  in  price.  The 
speculators  also  furnish  a  ready  market  in  which 
anyone  can  always  sell  or  buy  at  any  time  any- 
thing he  wishes  to.  If  there  were  no  speculators 
or  speculative  markets,  publishing  daily  price 
quotations  and  rendering  these  services,  the 
farmer  would  be  compelled  to  keep  his  grain  or 
cotton  perhaps  several  months  (unable  in  the 
meantime  even  to  pay  his  employees)  until  he 
could  get  into  communication  with  some  manufac- 
turer in  a  distant  city  who  would  buy  it.  Even 
then  the  farmer  would  not  know  what  price  he 
ought  to  receive,  nor  the  manufacturer  know  what 
he  ought  to  pay.  If  a  holder  of  some  railroad 
stock  desired  to  sell  it  he  would  waste  perhaps 
weeks  in  finding  an  investor  who  happened  at  that 
moment  to  want  to  buy  any  stock  at  all — much  less 
any  railroad  stocks,  or  especially  the  stock  of  that 
particular  railroad,  and  even  then  they  might 
never  agree  upon  the  price. 

The  Stock  Exchange  provides  a  large  room  in 
which  stock  brokers  meet  every  day,  bringing 


SPECULATORS  AND   MARKETS  101 

with  them  orders  to  buy  and  to  sell,  sent  in  to 
them  by  wire,  by  mail,  or  in  person,  from  cus- 
tomers all  over  the  world.  In  this  room  in  New 
York  alone,  omitting  all  reference  to  like  ex- 
changes in  other  cities,  often  a  million  shares  of 
stock  and  still  more  bonds  are  bought  and  sold 
every  day  between  buyers  and  sellers,  who  never 
meet  and  do  not  even  know  or  care  to  whom  they 
sold  or  from  whom  they  bought.  Each  gets  what 
he  wants  through  a  broker,  whose  business  is  to 
deal  with  other  brokers  in  executing  orders.  And 
in  consequence  the  whole  world  learns  through 
that  day's  evening  paper  the  world's  composite 
judgment  of  what  those  commodities  and  securi- 
ies  are  worth  that  day.  The  same  thing  takes 
place  in  the  Grain  Exchange,  the  Cotton  Exchange, 
the  Coffee  Exchange  and,  in  less  formal  and 
highly  organized  ways,  as  to  other  commodities. 

On  these  exchanges  there  are  two  kinds  of 
transactions.  The  sellers  who  actually  own  the 
goods  sell  them  there.  The  buyers  who  need 
\  them  for  actual  use  buy  them  there.  The  specu- 
lators are  also  there  to  keep  the  prices  steady,  by 
buying  the  excess  that  is  offered  in  case  a  large 
excess  forces  the  price  down  to  where  the  spec- 
ulator sees  a  bargain.  The  lower  the  price  is 
forced  down  by  excess  offerings,  the  greater  is  the 


102  THE  A  B   <5'S   OF  BITSINEB8 

number  of  speculators  who  come  in  and  buy,  until 
finally  enough  of  them  arrive  to  stop  the  price 
from  going  lower.  In  just  the  same  way  they 
prevent  prices  from  going  too  high,  by  selling 
short. 

Of  course  there  are  abuses  connected  with  all 
this,  just  as  there  are  abuses  connected,  for  in- 
stance, with  the  practice  of  medicine.  But  the 
speculator  is  a  most  legitimate  and  indispensable 
part  of  our  industrial  organization.  If  we  did 
not  allow  speculation  by  those  who  like  it,  we 
would  all  be  unwittingly  exposed  to  it  against  our 
desire.  Under  our  existing  system  we  can  avoid 
risks  and  uncertainties  by  employing  these  spe- 
cialists to  assume  them  for  us.  If  we  put  them 
out  of  business,  as  is  often  proposed  by  act  of 
legislature,  then  each  of  us  would  be  compelled 
to  carry  his  own  risks  and  hunt  for  his  markets 
as  best  he  could  and  it  would  seriously  interfere 
with  our  regular  business.  We  might  just  as 
sensibly  propose  to  abolish  insurance  companies, 
who  are  also  in  the  business  of  assuming  risks, 
and  let  each  of  us  assume  his  own  fire  hazards 
and  death  risks,  and  ship  cargoes  overseas  at  his 
own  peril,  or  that  of  the  bank  which  loaned  money 
against  the  cargo. 


CHAPTER  VIII 

GOOD  AND  BAD   TIMES 

Perhaps  the  most  striking  phenomenon  in 
American  business  life  is  its  alternation  between 
periods  of  prosperity  and  of  distress. 

A  period  of  true  prosperity  exists  when  the 
American  people  are  producing  a  maximum  quan- 
tity of  goods.  This  is  true  because  to  do  so  is  the 
sole  purpose  for  which  business  is  carried  on.  It 
has  no  other  end  than  to  produce  goods,  in  order 
that  we  may  enjoy  their  consumption  and  use 
while  producing  more  and  while  building  addi- 
tional machinery  for  producing  still  more.  Nat- 
urally, then,  we  prosper  when  every  man  and 
every  piece  of  machinery  is  working  every  day  at 
full  capacity.  When  that  is  happening,  goods  be- 
come abundant  and  incline  to  be  cheaper.  Every- 
one is  able  to  buy  what  he  normally  wants  in  mod- 
erate abundance,  being  fully  and  constantly  em- 
ployed. There  is  no  discontent  except  the  nat- 
ural desire  of  everyone  to  do  still  better;  which 
is,  of  course,  no  evil,  but  a  benefit— being  the  real 

103 


104 

force  which  is  back  of  all  material  human 
progress. 

But  our  industrial  life  is  capable  of  turning  out 
so  vast  a  quantity  of  goods  only  because  we  have 
organized  it  so  highly.  Organizing  it  consists  in 
each  man  doing  only  the  one  thing  for  which  he  is 
best  suited,  and  depending  on  all  the  others  to  do 
everything  else  for  him.  His  dependence  on 
others  is  absolute,  and  so  is  theirs  on  him.  K 
someone  fails  the  others  are  at  once  impeded. 
They  may  not  know  where  the  trouble  started,  or 
where  to  locate  it,  but  supplies  and  services  that 
have  been  coming  regularly  from  the  accustomed 
sources  are  no  longer  coming  or  are  coming  irreg- 
ularly. When  one  stops,  he  stops  the  others,  be- 
cause they  depended  on  him  for  something  with- 
out which  they  cannot  proceed. 

When  everyone  is  in  his  accustomed  place,  do- 
ing his  full  daily  work,  turning  out  the  expected 
quantity  of  his  particular  product  for  others  to 
use,  then  the  whole  organization  operates 
smoothly  at  top  speed;  great  wealth  is  produced 
for  distribution  among  us  and  we  prosper. 

In  a  mechanism  so  complicated  and  so  large 
that  there  can  be  no  single  guiding  head  to  con- 
trol and  regulate  it,  trouble  may  begin  anywhere 
or  at  any  time.    It  may  be  a  crop  failure,  a  large 


GOOD  AND  BAD  TIMES  105 

prolonged  strike,  the  failure  of  some  very  impor- 
tant financial  or  industrial  concern,  or  something 
else  great  enough  to  jar  the  entire  country  seri- 
ously. If  not  instantly  corrected,  the  entire  ma- 
chine begins  to  slow  down,  and  the  output  of 
wealth  to  diminish.  If  coal  does  not  arrive  from 
the  mines,  boilers  cool  and  factories  cease.  If 
transportation  lags  through  the  pauperized  and 
broken-down  railroads,  raw  materials  are  delayed 
or  perhaps  coal  again.  If  banks  are  in  trouble, 
credit  ceases  to  flow  and  all  business  stops.  If 
the  machine  is  running  rather  badly  just  then, 
anyhow,  or  is  being  overdriven  at  dangerous 
speed,  and  one  of  these  things  occurs,  it  is  likely 
to  produce  very  serious,  and  often  prolonged  busi- 
ness distress.  And  during  the  distress  we  do  not 
know  what  or  where  the  trouble  is  or  what  to  do 
about  it.  It  spreads  so  quickly  through  the  en- 
tire country  that  each  of  us  sees  it  in  a  different 
form  and  consequently  attributes  it  to  a  different 
cause.  No  two  of  us  are  in  exact  agreement  about 
it.  No  one  can  do  anything  and  so  we  wait  and 
work  as  best  we  can,  feeling  confident  that  good 
times  will  come  again.  Economic  laws  finally 
proceed  to  enforce  themselves  and  we  get  back 
into  gear  again.  It  was  said  that  the  Allies  were 
near  defeat  early  in  the  war  because  shells  were 


106  THE  A  B  O'S  OF  BUSINESS 

not  promptly  forthcoming  according  to  contract 
from  American  munition  factories.  The  shells 
were  required  to  fit  gun  barrels  to  a  thousandth 
of  ^  inch.  This  could  not  be  accomplished  with- 
out highly  accurate  gauges  used  in  the  manufac- 
ture and  measurement  of  the  shells.  In  filling 
Buch  large  orders,  these  gauges  wore  out  very  rap- 
idly and  could  be  obtained  only  from  a  certain  few 
makers  of  instruments  of  great  precision.  For 
some  perhaps  minor  reason  the  supply  of  these 
gauges  failed,  or  was  not  adequate,  and  the  whole 
world's  future  depended  upon  them  without 
knowing  it.  The  story  may  not  be  true,  but  it 
could  easily  have  been,  and  it  perfectly  illustrates 
our  dependence  upon  one  another. 

Anything  that  slows  down  any  part  of  our  in- 
dustrial organization  produces  the  immediate  re- 
sult of  slowing  down  some  other  part,  this  in  turn 
a  third  part,  and  so  it  all  approaches  a  standstill. 
If  it  stopped  we  would  about  all  perish.  The 
nearer  it  comes  to  stopping,  the  more  we  suffer. 
This  is  what  we  call  hard  times  or  a  business  de- 
pression. 

Progress  in  either  direction  of  slowing  down  or 
of  speeding  up  feeds  upon  itself.  When  break- 
down or  a  delay  occurs  at  any  point,  men  become 
idle,    They  are  out  of  employment;  receiving  no 


GOOD  AND  BAD  TIMES  107 

wages  they  can  buy  nothing  at  retail  stores  and  so 
retail  trade  declines.    The  retailer,  of  course,  then 
buys  less  from  the  wholesale  dealer,  who  in  turn 
gives  smaller  orders  or  none  at  all  to  the  factory, 
which  consequently  buys  less  raw  material  and 
fuel  and  lays  off  men  who  are  not  needed.    As 
this  results  in  fewer  goods  being  moved,  railway 
earnings  and  consequently  railway  purchases  of 
material  and  employment  of  train  men  also  de- 
cline.   Business  having  fallen  away,  men  are  dis- 
charged in  all  of  these  lines  of  employment  and 
their  purchases  from  the  retailer  are  still  further 
diminished.    The  retailer  thus  sees  a  still  further 
decline  in  trade  and  we  are  started  around  the  cir- 
cle a  second  time.    Every  decline  of  business  at 
any  point  at  once  causes  a  further  decline  at  an- 
other point.    We  continue  steadily  to  produce 
less  and  less.    Naturally,  at  the  same  time,  we 
consume  less  from  force  of  circumstances.    We 
thus  pass  into,  and  eventually  clear  through,  a 
period  of  business  depression  and  great  distress. 
It  may  last  only  a  matter  of  months  before  im- 
provement is  discernible,  or  it  may  endure  for 
years.    Our  total  business  activities,  of  course, 
do  not  cease.    Regarded  as  a  whole,  they  keep  on 
running  at  perhaps  ninety  per  cent  of  normal,  for 
it  is  said  that  a  variation  of  about  ten  per  cent  in 


108  THE  A  B  C'S  OF  BUSINESS 

our  total  production  measures  about  the  distance 
between  prosperity  and  business  depression. 

But  in  hard  times  there  might  easily  take  place 
a  drop  of  far  more  than  ten  per  cent  in  the  amount 
of  goods  we  consume.  In  other  words,  the  de- 
mand for  goods  is  subject  to  far  greater  fluctua- 
tion than  the  supply  of  them.  In  a  period  of  de- 
pression we  immensely  reduce  our  consumption 
of  goods,  we  waste  less,  and  we  work  harder  when 
work  is  obtainable.  In  consequence  wealth  is  be- 
ing gradually  created  faster  than  it  is  being  con- 
sumed and  it  increases.  In  other  words,  new 
capital  is  being  accumulated.  It  seeks  employ- 
ment and  so  new  undertakings  are  begun.  These 
employ  men  and  require  materials.  The  markets 
are  at  once  stimulated  and  the  entire  national 
machine  gains  a  little  speed.  While  it  was  slowed 
down,  the  weak  part  that  caused  the  breakdown 
in  the  first  place  was  probably  repaired.  We  are 
now  emerging  from  the  depressed  period  and 
business  grows  steadily  better.  Each  resumption 
of  activity  causes  a  further  one.  Newly  em- 
ployed men  spend  their  new  earnings  at  retail 
shops.  All  trade  becomes  better  and  hence  do 
also  manufacturing  and  transportation.  These 
once  more  call  for  more  workmen  and  prosperity 
begins  to  feed  upon  itself,  causing  more  pros- 


GOOD  AJSTD  BAD  TIMES  109 

perity.  And  then  we  feel  free  once  more  to  buy 
and  consume  goods  with  liberality.  Demands  ex- 
pand even  more  rapidly  than  supplies.  Rather 
regardless  of  price,  we  buy  what  we  want  and  bid 
against  one  another  for  it.  We  thus  force  prices 
higher  and  higher  and  the  business  situation  be- 
comes steadily  more  and  more  unsound  and  we 
consume  faster  than  we  produce.  We  undertake 
new  enterprises  that  require  much  capital  and 
credit.  We  think  we  may  safely  do  this  because 
prices  are  rising,  and  profits  are  easily  made  in 
everything.  We  borrow  freely  to  buy  anything, 
because  on  a  rising  market  it  can  surely  be  sold 
at  a  profit  and  the  debt  so  paid.  We  are  inclined 
to  speculate  too  freely.  Vast  credits  are  thus 
created  and  wealth  is  at  the  same  time  being  rap- 
idly consumed.  The  situation  is  very  unsound. 
The  machine  is  in  a  condition  to  be  very  easily 
thrown  out  of  order  and  as  soon  as  some  disaster 
occurs  of  enough  importance  to  derange  the  ma- 
chinery again,  we  enter  the  next  decline. 

Many  men  carefully  watch  and  study  these  ten- 
dencies. They  do  not  go  on  unnoticed  by  every- 
one, though  they  do  by  most.  There  are,  in 
America,  several  business  organizations  which  do 
nothing  but  study  the  progress  of  these  cycles  by 
collecting  statistical  data,  taking  careful  daily 


110  THE   A  B  O'S  OP  BUSINESS 

measurements  of  business  and  interpreting  what 
is  going  on.  They  can  tell  with  great  reliability 
what  stage  the  country's  business  has  reached  in 
its  progress  towards  prosperity  or  towards 
distress. 

The  more  intelligent  and  watchful  can  thus 
learn  that  at  the  crest  of  prosperity  danger  is 
very  near.  They  foresee  falling  markets,  con- 
traction of  credit,  business  failures,  reduced  pro- 
duction, and  unemployment,  and  they  prepare  for 
them.  They  sell  instead  of  buying.  They  coun- 
sel others  to  sell.  There  are  soon  many  sellers 
and  few  buyers,  and  so  prices  fall.  As  they  fall, 
manufacturers  stop  producing  goods  which  they 
know  they  could  sell  only  at  a  loss.  Business 
begins  to  decline,  men  are  again  out  of  employ- 
ment, and  progress  toward  depression  is  once 
more  under  way. 


CHAPTER  TX 

INTEBNATIONAUSM 

The  American  people  have  always  regarded 
anything  foreign  with  suspicion.  Foreign  polit- 
ical relations  and  our  foreign  commerce  have  been 
discussed  more  with  garrulity  than  with  under- 
standing, and  the  periodic  appearance  of  these 
two  subjects  during  presidential  campaigns  has 
exposed  them  to  an  onslaught  of  oratory  which 
has  added  but  little  to  our  knowledge.  Under 
such  circumstances,  and  remembering  that  until 
recently  we  have  had  little  reason  to  participate 
actively  in  international  affairs,  it  is  not  remark- 
able that  our  understanding  of  them  is  limited. 

From  the  time  of  the  discovery  of  this  continent 
until  the  present,  there  has  been  but  little  neces- 
sity and  no  inclination  for  entrance  into  world  af- 
fairs. The  early  settlers  pushed  westward  from 
the  Atlantic  and  turned  their  backs  to  Europe  and 
the  sea,  and  from  that  time  the  American  people 
have  devoted  their  efforts  almost  exclusively  to 

the  exploration  and  development  of  this  continent. 

Ill 


112  THE   A  B   O'S   OF  BUSINESS 

The  timber  and  mineral  resources  of  the  Great 
Lakes  region,  the  vast  and  fertile  area  of  the  Mis- 
sissippi watershed,  and  the  semitropic  south,  with 
wealth  in  cotton  and  sugar  cane,  held  the  attention 
of  the  pioneer,  and  the  middle  of  the  last  century 
saw  the  opening  of  the  Pacific  Slope,  with  new 
fields  for  settlement  and  exploration.  During 
this  long  period  the  Americans  were  confronted 
with  problems  purely  local.  Living  frequently  at 
great  distances  from  each  other,  and  cut  off  from 
contact  with  but  a  few  people,  it  would  be  sur- 
prising if  the  pioneers'  thoughts  had  not  been  re- 
stricted simply  to  the  events  of  their  daily  exist- 
ence. What  was  occurring  in  Europe  concerned 
them  much  less  than  the  happenings  in  the  nearest 
village,  and  the  condition  of  the  road  leading 
there.  They  required  but  little,  and  that  they  se- 
cured for  themselves. 

Previous  to  its  unfortunate  collapse  at  the  time 
of  the  Civil  War,  ship  owning  and  operation  flour- 
ished along  the  Atlantic  and  Gulf  Coasts,  but  the 
shipping  and  trade  of  that  time  were  conducted 
in  a  manner  impossible  to-day.  The  trade  con- 
sisted largely  of  cargo  lots  of  natural  products, 
and  there  was  not,  as  at  present,  a  world-wide  dis- 
tribution of  manufactured  articles;  and  such 
trade  as  existed  was  conducted  by  a  very  small 


INTERKATIONAUSM  113 

body  of  men,  out  of  the  sight  and  understanding 
of  the  great  bulk  of  the  American  people. 

The  greatest  achievement  during  the  nineteenth 
century  was  the  evolution  and  perfection  of  the 
American  railway  system,  but  it  was  the  physical 
work  only  which  we  did  ourselves — the  money 
with  which  to  build  the  roads  was  furnished  to  a 
great  extent  by  the  British,  French,  and  Dutch— 
or,  if  the  idea  of  the  payment  and  receipt  of 
money  is  eliminated,  we  may  say  that  Europe 
loaned  us  our  railroads. 

The  original  investment  of  European  capital  in 
America  was  the  initial  movement  in  an  enormous 
international  business  transaction,  which  we  have 
been  fifty  years  in  concluding.  For  that  period 
of  time  we  have  enjoyed  the  use  of  a  railway  sys- 
tem which  belonged  largely  to  Europe,  while  Eu- 
rope has  retained  certificates  of  ownership  in  the 
form  of  bonds  and  stocks.  We  paid  the  interest  on 
the  bonds  as  it  fell  due,  the  value  of  our  exports 
exceeding  the  value  of  our  imports  by  the  amount 
of  the  interest,  since  all  international  payments 
must  be  made  in  goods  (the  dollar,  pound,  franc, 
or  guilder  being  but  convenient  tokens  for  a  cer- 
tain quantity  of  any  commodity).  We  continued 
to  use  the  railroads  and  Europe  to  own  them  until 
the  opening  of  the  late  war,  but  the  extraordinary 


114  THE  A  B  O'S  OP  BTJSIKESS 

requirements  brought  about  by  such  extensive  mil- 
itary operations  could  not  be  met  in  the  ordinary 
way.  The  production  of  merchantable  commod- 
ities diminished  in  Europe  while  her  requirements 
increased,  and  to  meet  the  latter  situation  we  were 
asked  to  pay  for  our  railroads.  Our  bonds  were 
returned  to  us  and  in  exchange  we  sent  to  Europe 
munitions  of  war  and  foodstuffs.  Perhaps  a 
clearer  picture  of  what  occurred  may  be  obtained 
if  the  transaction  is  visualized  without  the  inter- 
vention of  time :  Europe  traded  us  railroads  for 
munitions  and  food. 

The  same  principle  is  in  evidence  in  all  interna- 
tional business.  Barter  did  not  cease  as  com- 
merce increased,  but  the  spirit  of  barter  has  been 
obscured  by  the  use  of  money.  As  an  illustration 
assume  that  I  manufacture  acetic  acid,  which  is 
used  in  the  production  of  rubber.  Having  plenty 
of  acetic  acid,  I  would  send  some  to  the  rubber 
plantations  in  the  Straits  Settlements,  in  ex- 
change for  which  I  would  be  offered  rubber,  which 
I  could  not  use.  So  the  rubber  growers  would 
give  me  money,  which  would  be  a  claim  against 
the  Straits  Settlements  not  only  for  rubber  but 
also  for  tin,  spice,  rattan,  or  any  of  their  prod- 
ucts ;  but  if  I  did  not  want  any  of  the  products  of 
the  Straits  and  desired  some  glass  bottles  from 


INTEKlSrATIOlfrALISM  115 

Belgium,  I  could  trade  my  claims  against  the 
Straits  for  claims  against  Belgium,  i.  e.,  Belgian 
money,  or  francs.  The  man  with  whom  I  traded 
could  then  obtain  what  he  wanted  from  the 
Straits.  From  the  foregoing  it  may  be  seen  that 
while  the  use  of  money  has  obscured  it  somewhat, 
barter  is  the  basis  of  commerce. 

The  value  of  our  imports  must  equal  the  value 
of  our  exports,  and  vice  versa.  Trade  must  bal- 
ance, though  an  examination  of  the  reports  of  the 
Department  of  Commerce  would  lead  one  to  be- 
lieve that  it  does  not,  which  is  deceptive.  In  pre- 
war times,  America  was  one  of  the  so-called 
'* debtor*'  nations,  or,  in  other  words,  our  visible 
exports  exceeded  our  visible  imports ;  and  by  vis- 
ible exports  and  imports  I  mean  those  which  are 
shown  in  the  Government's  statistics.  The  ex- 
cess in  value  of  exports  over  imports  represents 
the  cost  to  us  of  the  services  which  Europe  per- 
formed for  our  account,  and  for  which  we  have 
paid  in  the  only  way  we  can,  which  is  payment  in 
goods.  These  services  which  are  performed  for  us 
we  call  ** invisible"  imports,  and  when  accounted 
for  as  such  demonstrate  the  equality  of  our  in- 
coming and  outgoing  trade.  Invisible  imports 
consist  of  freight  and  passage  money  paid  foreign 
steamship  owneris  for  carrying  our  goods  and  our- 


116  THE  A  B  O'S  OF  BUSINESS 

selves,  premiums  paid  foreign  underwriters  for 
insuring  our  cargoes,  interest  on  American  secu- 
rities held  abroad,  and  the  money  spent  by  Amer- 
ican travelers  in  foreign  lands. 

To  facilitate  the  exchange  and  distribution  of 
commodities,  there  is  money,  but  as  each  nation 
employs  a  different  monetary  system  special  or- 
ganizations have  been  perfected  to  deal  in  foreign 
exchange,  or  the  money  of  the  different  countries. 
Exchange,  as  commonly  spoken  of,  means  the 
value  of  the  money  of  one  country  expressed  in 
the  money  of  another.  Sterling  (London)  ex- 
change is  quoted  at  par  as  about  $4.86,  which 
means  that  the  value  of  the  English  Pound  Steri- 
ing,  expressed  in  United  States  currency,  equals 
$4.86. 

Assume  that  the  United  States  was  selling  a 
great  volume  of  products,  raw  and  manufactured, 
to  England,  much  more,  say,  than  she  was  buying 
from  the  latter.  The  seller  in  this  country  would 
require  that  payment  be  made  in  dollars.  Con- 
sequently, the  buyer  in  Britain  would  go  to  an 
exchange  bank  to  purchase  dollars  wherewith  to 
pay.  In  exchange  for  £1,  he  would  receive  (at 
par)  a  draft  for  $4.86  against  the  London  bank's 
balance  in  New  York,  or  a  so-called  telegraphic 
transfer  of  the  money  could  be  made.    If  there 


IKTBBNATIONAUSM  117 

were  many  Britishers  wishing  to  buy  dollar 
drafts,  the  demand  for  them  would  be  greater 
than  the  supply.  Therefore,  the  dollar  would  sell 
at  a  premium  and  for  £1  only  $4.85,  or  less,  might 
be  given.  This  would  have  a  tendency  not  only  to 
check  the  purchase  of  American  goods  by  Britain, 
but  also  to  stimulate  the  purchase  of  .British 
goods  by  Americans,  since  goods  to  the  value  of 
£1  could  be  bought  in  England  for  $4.85  (a  saving 
of  a  cent  per  Pound).  The  result  would  be  that 
Britain  would  curtail  her  American  purchases, 
while  America  would  increase  her  British  pur- 
chases, until  a  balance  would  be  reached  and  ex- 
change would  be  gradually  forced  back  to  par. 

It  must  be  borne  in  mind  that  the  present  dis- 
organized state  of  the  European  exchange  is  due 
partly  to  the  presence  of  abnormal  factors  such 
as  repeated  violation  of  economic  law,  inflation, 
gold  embargoes,  depreciated  and  inconvertible 
paper  currencies,  and  so  forth,  and,  in  so  abnor- 
mal a  state  of  affairs  as  now  exists,  no  attempt 
should  be  made  to  account  for  it  on  the  basis  of 
trade  inequality  alone. 

Sooner  or  later  all  international  debts  must  be 
paid  in  goods.  Otherwise,  they  cannot  be  paid. 
The  European  countries  owe  the  United  States 
greatly  in  excess  of  ten  billion  dollars.     They 


118  THB  A  B  O'S  OF  BUSINESS 

are  not  in  a  position  to  pay  the  debt,  because  they 
cannot  produce  the  goods  with  which  to  pay  it. 
Their  industries  are  hampered  by  a  lack  of  capital 
with  which  to  buy  new  equipment  and  material 
upon  which  to  work.  Since  comparatively  little 
ready  money  is  to  be  had  in  their  own  countries, 
they  look  to  America  for  it,  and  by  failing  to  ex- 
tend further  credit  (in  the  form  of  machinery  and 
raw  materials)  to  Europe,  we  would  be  not  only 
preventing  the  payment  of  the  original  debt,  but 
also  indefinitely  prolonging  the  present  wretched 
state  of  European  affairs.  Clearly,  then,  the 
only  way  out  is  to  purchase  the  bonds  of  the  for- 
eign governments  and  corporations,  in  order  that 
they  may  employ  the  proceeds  in  the  purchase  of 
the  needed  materials  and  machines. 

The  large  interdependence  of  the  nations,  one 
upon  the  other,  was  very  forcibly  illustrated  dur- 
ing the  recent  war.  The  exasperation  evidenced 
in  the  textile  industries,  and  so  among  clothiers 
and  housewives,  due  to  their  inability  to  secure 
German  dyes,  may  be  easily  recalled,  and  other 
instances  were  only  too  numerous.  One  can 
imagine  the  annoyance  which  would  be  felt  were 
America  cut  off  from  the  tropics  and  consequently 
unable  to  secure  coffee,  tea,  chocolate,  spices,  rub- 
ber, tin,  lac,  jute,  edible  oils,  and  other  products 


HSTTKENATIONALISM  119 

quite  indispensable  to  us  and  yet  quite  impossible 
for  us  to  produce  ourselves.  Without  rubber,  for 
example,  fires  could  be  extinguished  only  with 
great  difficulty,  since  there  would  be  no  adequate 
hose;  surgery  would  be  greatly  handicapped;  mo- 
toring would  be  no  pleasure;  the  proper  insula- 
tion of  electric  wiring  would  be  impossible;  and 
ballooning  would  become  very  precarious.  Were 
England  absolutely  isolated  from  the  rest  of  the 
world,  starvation  would  be  prevalent  there  in  less 
than  one  month.  England  imports  four-fifths  of 
her  foodstuffs  and  pays  for  them  with  coal,  manu- 
factured articles,  and  various  commercial  serv- 
ices. Her  life  depends  upon  her  merchantmen 
and  the  freedom  of  the  seas. 

Foreign  commerce  is  not  mysterious,  except  in 
the  persistence  with  which  it  is  regarded  as  such. 
For  the  purposes  of  trade  the  nations  of  the 
world  are  as  one  nation.  Geographically,  polit- 
ically, linguistically,  and  in  many  other  ways,  the 
surface  of  the  earth  may  be  divided,  but  commer- 
cially no  country  is  unique;  commercially  the 
world  is  a  unit.  The  United  States  does  not  look 
to  China  for  a  government  or  a  language  or  a  sys- 
tem of  weights  and  measures,  but  for  camphor, 
silk,  tea,  hair  nets,  soya  bean  oil,  etc.  The  United 
States  depends  upon  China  in  the  same  way  that 


120  THE   A  B   O'S   OF   BUSINESS 

Texas  depends  upon  Wisconsin — ^f  rom  the  stand- 
point of  products  only.  Trade  between  New  Eng- 
land and  the  Gulf  States  is  not  called  foreign 
trade,  yet  it  is  quite  as  foreign  as  trade  between 
New  England  and  Canada.  In  the  former  in- 
stance many  hundreds  of  miles  intervene;  in  the 
latter  it  is  but  a  matter  of  tens  of  miles.  The 
products  of  the  world  are  international — there  is, 
and  has  been,  a  commercial  league  of  nations 
which  cannot  be  abolished. 

In  engaging  in  trade,  in  the  actual  practice  of 
it  by  importers  and  exporters,  the  world  is  divided 
for  the  sake  of  convenience  into  business  areas. 
That  this  is  done  should  not  be  taken  as  a  refuta- 
tion of  the  previous  paragraph.  These  divisions 
bear  the  same  relation  to  world  trade  as  the  busi- 
ness divisions  of  a  city  might  bear  to  that  city's 
trade.  They  in  no  way  destroy  its  unity,  but  are 
designed  for  convenience  and  efficiency  solely,  and 
take  into  consideration  such  factors  as  trans- 
portation routes,  languages,  laws,  products,  popu- 
lations, nature  of  governments,  climatic  condi- 
tions, systems  of  money  and  weights  and  meas- 
ures, business  customs,  purchasing  and  produc- 
tive power  of  the  peoples,  and  other  factors  which 
serve  to  connect  or  disconnect  districts.  Many 
of  the  confused  and  erroneous  ideas  concerning 


INTEBNATIONALISM  121 

world  trade  may  be  done  away  with  if  the  concep- 
tion can  be  grasped  that  trade  between  the  rest 
of  the  world  and  one  or  all  of  the  United  States  is 
conducted  in  precisely  the  same  manner  and  de- 
pendent upon  the  same  economic  laws  as  trade  be- 
tween these  states  themselves. 

Ships  are  the  instruments  by  which  water-borne 
commerce  is  carried  from  port  to  port.  They  are 
either  liners  operating  with  a  scheduled  run  over 
a  fixed  route,  or  tramps  taking  cargo  for  any  port 
if  offered  in  sufl&cient  quantity,  or  industrial  car- 
riers for  the  sole  use  of  the  corporation  to  which 
they  belong,  and  not  receiving  general  cargo  from 
the  shipping  public.  Since  the  trade  of  the  world 
increases  from  year  to  year,  at  intervals  ocean 
freight  rates  rise,  because  of  the  increased  de- 
mand for  space  aboard  ships.  This  encourages 
the  building  of  new  ships  and  the  formation  of 
steamship  companies.  Sufficient  ships  are  usu- 
ally built  to  exceed  demand,  and  then  the  price  of 
ships  and  ocean  freight  rates  decline.  There  fol- 
lows a  period  of  depression,  relieved  only  by  the 
retirement  or  loss  of  vessels  and  the  gradual  in- 
crease in  the  volume  of  commerce.  Ship  opera- 
tion is  governed  by  economic  law,  quite  as  all 
other  business  is. 

Without  the  uninterrupted  continuance  of  our 


122  THE  A  B  O'S  OF  BUSINESS 

trade  with  foreign  countries,  we  could  not  hope 
to  continue  our  own  prosperous  existence,  and  to 
suppose  that  we  could  abandon  the  crippled  na- 
tions who  are  our  neighbors  and  suffer  no  evil 
consequences  thereby,  is  the  veriest  nonsense. 
The  people  of  foreign  lands  are  to  us  as  fellow 
workmen,  and  whether  we  work  with  them  in  the 
same  factory  or  in  widely  separated  countries, 
makes  no  difference.  We  are  all  employed  to- 
gether in  the  performance  of  the  world's  work. 
If  several  of  our  most  efficient  fellow  workmen 
have  their  tools  destroyed  and  are  themselves 
weakened,  how  shall  the  world's  work  go  for- 
ward? If  they  temporarily  lack  tools  and  mate- 
rials, what  could  be  more  logical  than  to  lend  to 
them  a  part  of  our  own,  so  that  the  great  task 
might  be  undelayed?  These  temporarily  disabled 
workmen  have  skill,  intelligence,  character,  and 
industry,  and  our  progress  and  the  world 's  prog- 
ress will  best  be  advanced  by  lending  them  the 
tools  and  material  which  they  need;  particularly 
as  they  are  already  heavily  in  our  debt  and  other- 
wise would  undoubtedly  be  unable  to  pay.  There 
is  nothing  more  to  the  question  of  the  extension 
of  credit  to  foreign  countries.  The  world  in  gen- 
eral, and  in  particular  America,  will  best  be 
served  through  the  lending  of  capital  by  localities 


INTEBNATIONAIiISM  123 

which  can  spare  it  the  best  to  those  localities 
which  need  it  the  most,  regardless  of  the  geo- 
graphical position  of  either  region. 

In  deciding  with  whom  we  shall  trade,  we  are 
governed  rather  largely  by  our  sentiments.  To 
deal  with  our  friends  is  preferable  to  dealing  with 
people  for  whom  we  have  no  feelings  whatsoever, 
or  perhaps  even  dislike  or  distrust.  Having  con- 
fidence in  our  friends,  we  turn  more  frequently  to 
them  for  our  requirements  than  to  strangers ;  and 
while  we  have  recognized  and  capitalized  this 
phenomenon  in  our  dealings  with  each  other,  we 
have  failed  almost  completely  to  observe  that  it 
may  be  quite  as  effectively  applied  to  dealings 
with  foreigners,  an  oversight  which  has  cost  us 
probably  many  milhons  of  dollars. 

Our  competitors  for  many  valuable  markets, 
such  as  Latin  America  and  the  Orient,  have  never 
neglected  the  cultivation  of  their  prospective  cus- 
tomers, whether  by  learning  their  language, 
adopting  their  customs,  or  marrying  their  daugh- 
ters; and  as  a  result  American  agents  have  fre- 
quently knocked  vainly  on  the  door  to  the  office 
while  the  proprietor  danced  or  drank  in  the  com- 
pany of  the  Germans  or  British.  The  Germans, 
in  particular,  but  all  Europeans  as  well,  have  al- 
ways made  a  point  of  becoming  as  nearly  as  pos- 


124  THE  A  B  O'S  OF  BUSINESS 

sible  like  the  man  with  whom  they  desire  to  trade, 
thus  reducing  friction  to  a  minimum.  In  contrast 
to  this  is  our  own  policy,  which,  with  few  excep- 
tions, has  been  one  of  indifference  or  contempt, 
caused,  no  doubt,  by  arrogance  and  ignorance. 
That  such  should  have  been  our  foreign  commer- 
cial policy  is  unfortunate,  and  since  our  internal 
trade  is  not  conducted  in  such  a  way,  one  is  forced 
to  the  conclusion  that  it  is  only  because  we  have 
failed  to  study  the  foreigner  that  we  mistrust  and, 
perhaps,  pity  him.  In  considering  the  people  of 
other  countries,  we  contrast  them  too  much  with 
ourselves,  as  if  we  were  an  international  standard 
of  some  sort;  and  the  contrast  is  almost  invari- 
ably made  with  superficialities. 

The  British  drive  their  vehicles  on  the  **  wrong" 
side  of  the  street ;  but  what  about  ourselves  from 
their  standpoint?  Orientals  feed  themselves 
with  sticks,  but  they  probably  regard  as  curious 
the  small  metallic  implements  with  which  we  eat 
But  these  are  merely  surface  differences,  and  do 
not  merit  the  time  we  devote  to  being  annoyed  by 
them.  The  British,  for  example,  will  be  found  to 
be  a  delightful,  honest,  courageous,  and  sober 
people,  if  we  can  forget  that  they  are  superficially 
different  from  ourselves.  We  have  built  a  barri- 
cade of  trivial  comparisons  between  ourselves  and 


iJSrTBKITATIONAUSM  125 

the  rest  of  the  world,  behind  which  we  congrat- 
ulate ourselves  on  being  not  as  other  men,  and 
until  this  is  replaced  by  a  healthier  receptivity  to 
foreign  ideas  and  a  more  generous  consideration 
of  foreign  activities,  we  shall  find  ourselves  seri- 
ously handicapped  in  all  international  nego-- 
tiations. 


CHAPTER  X 

EDUCATION 

It  is  characteristic  of  the  American  mind  to 
love  the  simple,  direct,  and  practical  way  of  do- 
ing things.  Unlike  Europeans,  who  seem  to  be 
more  thorough,  we  do  not  like  the  slow,  patient, 
toilsome  investigation  of  any  subject.  The  Amer- 
ican mind  seeks  a  simple,  direct,  and  easily  under- 
stood explanation  of  any  problem,  and  an  answer 
of  that  kind  always  satisfies  us  if  it  seems  plaus- 
ible. We  have  neither  time  nor  patience  for  long, 
laborious,  and  painstaking  studies.  If  we  ask 
why  business  is  bad  this  year  and  are  told  it  is 
because  this  is  a  presidential  year,  the  answer 
satisfies  us  because  it  is  simple  and  easily  under- 
stood. There  has  never  been  any  truth  in  it  (ex- 
cept in  one  or  two  presidential  campaigns  such  as 
the  one  that  threatened  our  entire  monetary  sys- 
tem) but,  being  simple  and  plausible,  we  would 
rather  accept  it  and  pass  on  to  something  else 
than  listen  to  a  long  and  highly  involved  analysis 
of  a  difficult  and  complicated  subject. 

126 


BDTTOATION  127 

This  is  our  national  habit  about  everything.  In 
educating  our  young,  we  take  the  simple  course 
that  disposes  of  the  whole  task  at  once.  We  send 
them  to  college.  The  decision  is  made  in  a  day. 
They  go.  The  problem  is  solved  and  we  pass  on 
to  other  matters.  It  is  just  part  of  our  highly 
developed  system  of  specialization  in  everything. 
Education  is  supplied  to  us  by  educators  at  col- 
leges. We  buy  some  for  our  young  just  as  we 
buy  clothes.  The  universities  furnish  a  standard- 
ized, factory-made  article,  turned  out,  like  Ford 
motor  cars,  on  the  basis  of  quantity  production. 
Like  the  Ford  car,  it  is  an  excellent  thing  but  by 
no  means  the  best.  A  Rolls  Eoyce  quality  of  edu- 
cation is  obtainable.  But  the  other  make  is  the 
only  kind  most  of  us  take  the  trouble  to  know  any- 
thing about.  When  we  speak  of  education,  we 
automatically  say  college  education.  It  is  our 
national  conception  of  the  only  way  to  obtain  one. 
It  would  greatly  shock  the  average  American 
parent  to  be  told  that  his  highest  duty  in  the  world 
is  to  devote  laborious  and  fatiguing  years  to  de- 
veloping his  child's  intellect  and  understanding; 
and  to  impart  to  it  all  his  own  knowledge  and  all 
of  other  people's  that  he  can  assist  the  child  in 
obtaining.  It  is  the  one  occupation  of  parents 
that  should  take  precedence  of  everything  else. 


128  THE  A  B   C'S  OF  BUSI1TES8 

It  has  been  pointedly  said  that  if  a  boy  is  not  an 
educated  boy  at  the  time  he  enters  college,  he  will 
probably  never  become  one.  College  or  univer- 
sity training  is  of  almost  priceless  value,  but  it  is 
no  more  than  part  of  an  education,  and  perhaps 
not  the  most  important  part.  It  can,  moreover, 
be  obtained  outside  of  these  institutions  and,  un- 
der favorable  conditions,  can  be  better  done  in 
proportion  to  the  time  employed.  And  yet  we 
offer  the  excuse  of  having  been  denied  a  college 
education  to  explain  and  justify  intellectual  pov- 
erty. It  is  a  shocking  national  confession  of 
incompetence. 

Probably  the  highest  stimulant  and  aid  to  edu- 
cation is  the  companionship  of  intellectual  people. 
Association  with  them  creates  a  desire  for  knowl- 
edge and  understanding,  and  it  points  the  way  to 
the  sources  from  which  these  may  be  obtained. 
It  is  but  poorly  supplied  by  the  companionship 
of  the  nursemaid.  There  is  almost  no  discovery 
in  the  whole  domain  of  knowledge  that  ever  died 
with  the  discoverer.  It  has  all  been  reduced  to 
writing  and  preserved  in  books.  These  may  even 
be  had  for  nothing  through  the  public  libraries. 
Free  advice  regarding  them  is  even  furnished. 
To  be  sure,  there  is  among  these  books  much  rub- 
bish ;  some  of  it  merely  harmless  and  some  injuri- 


EDUCATION  129 

ous.  The  first  requirement,  then,  is  to  escape 
positive  injury  by  avoiding  the  injurious ;  to  econ- 
omize time  by  also  avoiding  the  merely  worth- 
less; and  to  concentrate  one's  attention  upon  the 
remainder  which  is  of  value.  This  is  the  first 
task.  It  is  the  most  difficult  part  of  the  whole 
undertaking.  It  can  be  done  only  through  ob- 
taining sound  advice,  guidance,  and  suggestion, 
and  it  furnishes  the  reason  for  saying  that  the 
greatest  aid  to  education  is  found  in  the  compan- 
ionship of  those  already  possessing  superior  edu- 
cation and  high  intellectual  development. 

Careful  and  discriminating  selection  of  books 
rests  upon  the  same  principle  that  underlies  ad- 
vertising. The  principle  of  advertising  seems  to 
be  that  if  an  idea  once  enters  the  human  mind  it 
will  make  an  impression  that  remains  there,  espe- 
cially if  it  enters  several  times  and  deepens  the 
impression  each  time.  The  source  from  which 
the  idea  came  is  seldom  remembered.  As  a  na- 
tion, we  firmly  believe  that  chewing  gum  aids  di- 
gestion. We  are  not  at  all  sure  whether  we  were 
told  it  by  physicians  or  read  it  upon  billboards, 
but  we  believe  it.  It  is  part  of  our  knowledge. 
Our  entire  knowledge  is  full  of  these  impressions. 
They  may  be  obtained  from  respectable  sources 
fully  worthy  of  confidence,  and  so  may  be  of 


130  THE  A  B  O'S  OF  BUSINESS 

value ;  or  they  may  be  most  injurious  and  mislead- 
ing if  they  are  the  work  of  ignorance. 

Naturally,  then,  one  should  never  permit  his 
mind  to  receive  untrustworthy  information  if  he 
can  prevent  it.  It  is  not  enough  that  someone 
has  written  a  book  on  a  given  subject.  Before 
one  allows  himself  to  read  it,  he  should  first  as- 
certain, if  possible,  whether  the  author  had  a 
right  to  be  heard  on  that  subject.  We  should  not 
carry  this  to  the  length  of  insisting  that  the  au- 
thor's views  agree  with  our  own.  Our  impres- 
sions already  existing  on  the  subject  may  be 
wholly  wrong  (probably  are)  and  the  author  may 
erase  them  for  us  and  make  correct  ones.  But 
before  reading  his  book  we  should  use  every  effort 
to  ascertain  that  he  really  is  a  respectable  author- 
ity on  the  subject.  By  this  method  we  exclude 
from  the  mind  much  misinformation  and  include 
only  knowledge  that  is  probably  reliable,  and  the 
result  of  this  policy,  pursued  over  a  period  of 
years,  must  inevitably  lead  to  broad  understand- 
ing, correct  judgment,  and  accurate  knowledge. 

It  is  said  that  every  year  about  six  hundred 
newspapers  and  two  books  enter  the  average 
American  home.  A  daily  newspaper,  containing 
news  hurriedly  gathered  from  all  over  the  world 
upon  a  thousand  subjects,  with  no  time  for  veri- 


HPUOATION  131 

fication,  printed  and  distributed  within  a  few 
hours,  by  men  who,  however  brilliant,  could  make 
no  pretense  to  accurately  verified  correctness 
upon  all  the  subjects  it  must  print  news  about, 
should  naturally  not  be  one's  main  source  of 
knowledge.  It  can  be  safely  read  as  to  market 
quotations,  or  as  to  who  was  nominated  for  office, 
or  as  to  almost  any  occurrence  not  at  all  likely  to 
have  been  misunderstood  by  the  young  reporter 
who  gathered  the  item  and  hurriedly  wrote  it  in 
the  scant  time  allowed  him.  But  certainly  one 
would  not  permit  his  mind  to  absorb  and  retain 
the  impressions  that  would  become  his  if  he  read 
a  newspaper  account  of  some  new  discovery  in 
medicine  or  astronomy,  because  it  is  almost  cer- 
tain that  the  reporter  who  got  the  story  was  just 
a  bright  young  man  who  knew  nothing  at  all  about 
the  subject  and  did  not  even  know  the  meaning 
of  the  terms  that  were  used  in  telling  him  about  it. 
It  is  the  duty  of  a  newspaper,  of  course,  to  serve 
up  everything  new  as  best  it  can  consistently  with 
speed,  which  is  our  first  demand  upon  it.  But  it 
is  not  our  duty  to  expect  universal  learning  and  a 
liberal  education  from  the  daily  press  or,  for 
somewhat  analogous  reasons,  from  indiscriminate 
reading  of  popular  magazines.  And  these  seem  to 
be  the  main  sources  of  the  supply  of  knowledge  to 


132  THE  A  B  O'S  OF  BUSINESS 

the  American  people,  so  far  as  they  obtain  knowl- 
edge by  reading  at  all. 

We  complain  of  and  abuse  our  newspapers 
largely  because  we  misunderstand  and  misapply 
them.  At  the  cost  of  a  few  pennies  to  us  they 
furnish  the  news  of  the  day  from  the  entire  world, 
and  the  governing  considerations  are  compelled 
to  be  brevity  and  speed.  To  expect  thoroughness 
and  reliability  as  well  would  be  preposterous,  and 
yet,  in  pure  mental  indolence,  we  make  the  news- 
paper our  main  source  of  knowledge  because  it  is 
so  convenient,  interesting,  and  cheap.  The  mod- 
ern newspaper  is  possibly  the  most  marvelous  of 
our  achievements,  but  we  do  ourselves  great  in- 
jury by  reading  it  in  a  spirit  or  purpose  for  which 
it  never  was  designed.  The  harm  it  does  us 
seems  in  no  way  seriously  chargeable  to  the  paper 
but  to  misunderstanding  of  it.  The  harm  could 
be  mainly  avoided  if  we  would  read  it,  much  as  it 
is  written,  realizing  that  it  is  only  the  world's  gos- 
sip, probably  no  more  reliable  than  what  we  hear 
and  repeat  to  one  another  by  word  of  mouth.  It 
is  hurriedly  gathered  and  we  will  not  wait  for  it 
to  be  verified  or  corrected.  The  editors,  in  select- 
ing and  serving  it  to  us,  are  probably  somewhat 
influenced  by  their  editorial  views  and  policies,  or 
they  would  not  be  human,  and  being  much  like  the 


EDUCATION  133 

rest  of  us,  they  probably,  in  occasional  instances, 
are  influenced  by  at  least  reasonable  consideration 
for  their  advertising  patrons,  without  whom  they 
could  not  live.  If  they  did  not  also  color  it  some- 
what to  make  it  interesting,  we  would  not  buy  it. 
These  things  are  all  practical  and  necessary.  Ex- 
perience has  proved  that  we  do  not  want  and  will 
not,  as  yet,  support  newspapers  of  any  materially 
different  kind.  They  are  pricelessly  valuable  as 
newspapers  but  we  should  not  make  them  (as  we 
are  doing)  almost  our  exclusive  source  of  infor- 
mation and  opinion  and  expect  thereby  to  educate 
ourselves  into  any  very  high  degree  of  intellectual 
attainment. 

The  highest  duty  of  management  in  business  is 
to  educate,  not  merely  the  manager  himself  but 
those  below  him ;  and  it  will  not  be  accomplished 
by  reading  the  trade  organ  of  that  particular  in- 
dustry. Successful  management  of  large  organ- 
izations consists  mainly  in  the  employment  of  men 
who  are  more  than  merely  competent  to  their  sev- 
eral tasks.  Men  are  competent  and  valuable  not 
according  to  what  they  have  been  or  because  of 
previous  experience,  but  rather  according  to  what 
they  may  become  and  thereafter  accomplish  by 
possessing  highly  developed  intellectual  power 
and  applying  it  under  the  inspiring  leadership, 


134  THE  A  B  O'S   OP  BUSINESS 

suggestion,  and  advice  of  a  real  manager.  The 
most  valuable  man  probably  will  not  be  the  one 
who  has  been  the  most  drilled  in  routine  experi- 
ence. He  will  be  the  one  who  possesses  extraor- 
dinary qualities.  The  highest  of  these  is  culti- 
vated intelligence.  In  its  broad  sense  it,  of 
course,  includes  character.  It  may  be  encouraged 
and  developed  anywhere — in  the  ofiSce  or  in  the 
ranks  of  labor.  The  able  and  successful  manager 
is  the  man  who  oan  recognize  it  when  he  sees  it; 
who  can  encourage,  develop,  and  further  educate 
it;  who  is  big  enough  not  to  be  jealous  of  it  or  to 
suppress  it.  If  it  attains  to  a  superiority  that 
finally  supersedes  and  displaces  him,  then  his 
management  has  been  perfect,  justice  has  been 
done,  and  the  highest  purposes  of  organized  so- 
ciety have  been  served. 

On  the  other  hand,  excepting  for  occasional  in- 
stances of  unmerited  injustice,  poverty  and  fail- 
ure are  Nature's  gift  to  ignorance.  It  is  unde- 
niably within  the  power  of  almost  any  American, 
who  has  the  desire  and  the  determination,  so  to 
cultivate  his  mind  and  understanding,  by  elevat- 
ing association  and  by  study,  as  almost  certainly 
to  compel  his  own  advancement.  The  distance 
he  can  go  will  be  limited  only  by  his  own  fitness 
for  the  performance  of  higher  tasks  and  better 


EDUCATION  135 

paid  ones.  K  his  employer  does  not  allot  them 
to  him,  some  other  wiser,  and  therefore  more  suc- 
cessful, employer  will,  and  the  more  conspicuously 
he  merits  it  the  sooner  it  will  occur.  The  prog- 
ress is  often  very  slow,  but  it  is  fairly  sure.  In 
any  event,  it  is  the  only  road  there  is.  Few  even 
start  upon  it,  but  remain,  in  sodden  and  indiffer- 
ent incompetence,  where  they  began,  blaming  the 
world  and  an  organized  society  which  they  con- 
sider has  enslaved  them.  It  is  mainly  a  self- 
imposed  slavery. 

Probably  the  most  eloquent  advocate  of  free- 
dom, and  foe  of  oppression,  that  America  ever 
produced  uttered  the  just  judgment:  ** There  is 
no  Slavery  but  Ignorance ;  Liberty  is  the  child  of 
Intelligences '* 


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AUG  191936 

OEC   2&  1937 

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'--'-2.'D;7 

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UNIVERSITY  OF  CAUFORNIA  LIBRARY 


